Read most articles about consolidating pension funds and you’ll probably think that pension consolidation is just about cutting costs and increasing fund performance. That’s OK. Bringing all your pension pots together under one roof can often reduce administration costs. And moving money to higher performing funds is a smart move too.
But there are a number of hidden benefits which you’ll rarely find discussed. Here are three of them.
Benefit #1 – You know what you’ve got.
Planning how to create a retirement income isn’t as simple as choosing whether to buy an annuity or moving a fund into drawdown. True, for some people that’s the extent of the decision. But for anyone with serious wealth, the decision is much more complex.
If like most of us you’ve had a number of employers over your working life, you’ll also have a number of pensions, and of various types. By the time you approach retirement you will therefore have accrued a varied portfolio of assets. It’s important to know how these are going to work together to provide for you and your family effectively through retirement and beyond.
It could be right for you to withdraw money from your ISAs now and defer taking benefit from your pension until some future point. You might have a number of buy to let properties that can generate an income for a few years until you sell them. All are valid options must be considered when creating your retirement plan.
In addition, you might need to adjust your strategy in response to changing markets, taking the opportunity to sell certain assets if prices are favourable.
But here’s the rub.
You can only make these investment decisions if you know what assets you hold and where. That’s not possible is you’ve got pots of money here there and everywhere. The paperwork is just too complex. Consolidating pension funds allows you to hold all your pension assets in one platform and means that you can make intelligent choices and execute on them quickly.
Benefit #2 – Estate planning becomes achievable.
I encourage people to think of their pension not just as a source of retirement income, but also as a family asset that can be passed on to future generations. Pensions are not subject to inheritance tax and can be used to pass money on tax-efficiently. This could save tens of thousands of pounds, even on quite modest estates.
No one knows how long they will live. It’s therefore wise to make sure that your chosen vehicle is prepared and ready to be for use whenever the worst happens.
Adopting a multi-asset approach to creating a retirement income means that you may not need to drawdown much income from your pension. It may even be untouched at death. By not taking the opportunity to consolidate your pension funds you may be leaving a can of worms for your executors. Unintentional, of course, but finding out where your money is held might be difficult.
The worst scenario is that one or more of your pension funds don’t get found. When this happens the unclaimed money is returned to trust-based pension provider or passed onto government in the case of contract-based schemes. Either way that’s money that won’t be passed onto the kids.
Even if all are traceable, it’s a huge task to give to someone. People now work for an average of 9 employers. That means there are 9 pensions to handle. Nine companies to contact. Nine forms to fill in. You get my drift. Consolidating sooner rather than later makes sense.
Benefit #3 – You can access money quickly
Every now and then things come up that mean you want to get access to cash, and quickly. You might need money to invest in your business, to buy a property or to help out your children.
You might therefore want to get access to your pension. This is easily done if all your schemes are together in one place. Within seven days the money could be in your account.
However, depending on where your investments are currently held this may not be possible without consolidating your pension funds. It takes much longer, if for example, you want to transfer money out of a defined benefit scheme. Due to the regulatory controls that exist, we find it typically takes 2-6 months to transfer money out of such schemes.
Consolidating pension funds doesn’t just help you when it’s time to take money out of your pension. You’ll also be able to make speedy adjustments to your portfolio should markets be on the turn and it be important to move into or out of different asset classes to protect and grow your investments.
How many different pension pots to do you have? Is consolidating pension funds something you’ve considered? Do you think there are more benefits that I’ve not covered here? Join the conversation below.