People are now more likely to have a number of different jobs during their career and will often be enrolled into a new pension at each new workplace. This means you may end up with several pension plans with different providers, and it can be confusing trying to keep track of them all.
There are two main types of pension scheme available:
- Defined Contribution (or money purchase) – you and/or your employer make contributions (in which you may also benefit from tax relief) to build up a personal pension pot that you can then use to provide an income in retirement. The value of your pension pot and the retirement income it will provide is not guaranteed and depends upon the total amount of contributions made, the investment growth achieved and the level of charges applied.
- Defined Benefit (or final salary) – is a special type of employer sponsored pension scheme that provides members with a guaranteed retirement income for life that usually increases each year to protect against inflation. The level of retirement income received will be based upon a member’s final (or averaged) salary and their length of service.
The Financial Conduct Authority (FCA) and The Pensions Regulator believe that it will be in most people’s interest to keep any benefits held within a defined benefit pension scheme*.
As such, the sole purpose of this article is to highlight the main factors when considering the potential consolidation of defined contribution pensions only. The considerations for a potential transfer of a defined benefit pension is beyond the scope of this article and would require specialist pension transfer advice (that is not available from Nockolds Wealth).
One of the options you have for your defined contribution pensions is to combine all of them into one single pot.
Benefits of Consolidation
Less hassle: By combining all your pensions into a single plan you can reduce the hassle which comes with managing and keeping track of different pots to a single plan which is easier to manage.
Reducing paperwork: A new plan could allow you to view your pension online. You can check your balance, make top ups and withdrawals online with minimum paperwork required.
Greater control: With a single pension plan you can ensure that the funds are invested how you want them to be in line with your attitude to risk, as well as finding it easier to track performance and being aware of the fees and charges you are paying.
Improved retirement planning: It can also be easier to see what your retirement will look like, and giving you an idea of how big a shortfall there is between your current pension savings and the size of the pot needed to provide you with a comfortable retirement.
Flexibility: A lot of older pension plans do not give you as much choice over how you access your money. By switching to a new single plan you could have greater flexibility over access to your money when you need it.
These are some of the benefits of consolidating your pensions, but it is also important to make sure that you are aware of all the details of your existing pensions as you could potentially be giving up some valuable benefits.
Things to Check Before You Consolidate
Safe Guarded Benefits: Some pension plans have valuable guarantees attached, such as guaranteed annuity rates or guaranteed growth rates which may be lost if you decide to transfer out from the scheme. So, it is always important to check whether you are entitled to any of these, and if you still want to go ahead with the transfer despite this.
Protected Tax Free Cash: Some older pension plans may have an enhanced tax free cash entitlement above the usual 25% which may be lost on transfer.
Exit fees and charges: Some plans especially older ones may put in place an exit fee or penalty if you want to move your money to a new plan. The fee will usually be a percentage of your pension savings, although if your pension is in a ‘with-profits’ fund then your exit fee may come in the form of a Market Value Reduction (MVR). You should carefully consider whether any perceived benefits of moving the funds to a new pension outweighs any exit fee, charges or MVR that may apply.
In addition, where a new pension has higher charges than any existing pension(s) it is also important to consider whether the new plan offers sufficient additional benefits to warrant the additional cost.
As you can see, there is a lot to think about before consolidating your defined contribution pensions and you should seek independent financial advice. Speak to a member of Nockolds Wealth to find out more.
- This article is for your general information only, and is not intended to address your particular requirements. The content should not be relied upon in its entirety and shall not be deemed to be, or constitute, advice.
- No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of the content.
- Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is provided or that it will continue to be accurate in the future.
- Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the specific circumstances of the individual. All figures relate to the current tax year unless otherwise stated.
- The value of your investments and the income derived from them can go down as well as up and you may get back less than you invested. Where stated, past performance is used as a guide and is no guarantee of future returns
- There is no guarantee that a new/consolidated pension plan will perform better than your existing pension plan(s).
- During a transfer of funds between pension providers, your pension fund will not be invested while the transfer is taking place and will therefore not benefit from any potential investment growth during this period.
* (Source: FCA website, last updated 05/06/2020