Consolidating your pension FAQs
Is it now time to consolidate your pension pots? Do you realise that your pension savings could be gradually reducing by leaving things as they are?
With close to fifty years of working life to fill, changing your employer multiple times over is now the norm.
In fact, research provided by the Pension Tracing Service shows that you’re likely to changes jobs 11 times before you retire, and all that change means you’re not just racking up entries on your CV, but pension pots too.
This article will explain both the potential benefits and disadvantages of consolidating your pension plans. It also relate each section to a client case study that should help you relate the points raised back to your own circumstances. And Finally, this guide will explain how Reeves Independent can help you gain control of your own pensions and investments.
I'm not sure what pension I have?
Pensions fall into two broad groups, Defined Contribution and Defined Benefit schemes.
Defined Contribution schemes build up a pension pot to provide you with a retirement income based on contributions from you, and your employer. Your pot is an investment-based plan and the retirement value depends on how much has been paid in and how well the investments have performed, less any charges.
Defined Benefit schemes pay a guaranteed retirement income based on your salary and how long you have worked for your employer.
Consolidating Defined Contribution schemes is the more common of the two, however, it is also possible to transfer out of a Defined Benefit scheme. In both scenarios, it is vital that you understand the full picture and seek independent financial advice.
It is easy to keep track of objectives?
Yes, it is. By bringing your plans together they are easier to keep a track of. Rather than having to stay on top of lots of different pension plans, consolidation means you just have one account to review.
With older pension plans, it is common that you only receive a paper statement of your policy once per year. By moving to a more modern plan you will be able to transparently see the value of your pension 24 hours a day online.
This is vital in establishing your progress towards your goals and helps you identify any changes that may be needed. It helps in delivering an effective investment strategy as you can clearly see what assets you own.
Let’s highlight this in a client case study.
James had looked ahead to his retirement and intended to make the most of it. He paid into various pension for about 10 years and had plans to retire when he was 55.
However, he did not know whether he was on track to achieve his goal because he had 7 different historic pension policies and had no idea of the value or where they were invested. A couple of years ago he came to us and our review of his financial situation revealed that there was a danger his pension pot wasn't going to be big enough to allow him to meet his target.
Fortunately, we identified the problem in time. We consolidated James’s pensions into a modern, manageable pot.
Together with James, we devised a strategy whereby he would increase his pension contributions. He had saved a significant sum in ISAs, which he can use this money to contribute into his pension pot and receive 40% tax relief to add to it, as he is a higher rate taxpayer. These measures together mean that James is now back on track to meet his target retirement age.
Are there any penalties for transferring?
Yes, there may well be. Your pension provider may impose an exit penalty onto your plan. This would be charged if you initiated a transfer. Normally the penalty expires after a certain period. It is vital that you understand the financial implications that transferring your pension may cause.
Often penalties can be substantial, and it’s a way of the pension provider ensuring that you remain with them for a set period.
However, you should still consider it.
Recently John, aged 51, approached us for a review of his current pension and investment arrangements. He had two policies, which were both with the same pension administrator. After we conducted our analysis, we found both policies had exit penalties. The first plan, that contained a fund value of £100,000, had an early exit penalty of £800. The second policy, which was a substantially smaller value of £4000, also had an exit penalty of £515. Both penalties would apply if john decided to transfer the plans before the age of 60, which for him was 9 years away.
When meeting with John, we explained the implications that consolidation would cause and after a thorough discussion he decided he wanted to transfer his larger plan to a more modern platform and allow Reeves to take control of the ongoing management. The expectation is that overtime the effect of professional advice would outweigh the exit penalty.
Now John is reaping the benefits of Reeves ongoing services, his money is held on a modern investment platform which in retirement allows him to access his pension flexibly. Reeves Independent are now making John’s money work for him.
Does consolidating mean improved investment choice and performance?
Indeed, it does. Some pensions have better investment options than others – by consolidating you can take advantage of those options and wave goodbye to under-performing investments. This is probably the biggest reason to consolidate since investment performance overtime is likely to be one of the largest factors in how big a pension income you will eventually receive.
Poor investment performance can happen for a variety of reasons. At Reeves we believe an awareness of market conditions and good timing are vital in the effective planning of an investment portfolio. In recognition of that, we have developed and refined over several years, a sophisticated process of tactical decision making for asset allocation to anticipate market shifts and to protect our client's assets.
Recently Barbara came to us for a review, an experienced and confident investor who had approximately £300,000 in money purchase schemes. She decided to test the water, initially entrusting us with 25% of her pension funds.When the markets fell by a significant amount in Q4 2018 Barbara’s money with Reeves fell fractionally compared to the investment she had left in her old arrangement. This was thanks to those tactical moves we had made into uncorrelated assets to pre-empt the market correction.
Is there a risk of being scammed?
Sadly, yes. At Reeves, we’ve several clients who, before they came to us, had fallen victim to scams or to plain old-fashioned bad advice. We've all heard the horror story of people losing their life savings.
There’s one golden rule which applies in all cases and that’s to ensure that your adviser is reputable, qualified and properly authorised. Make sure that before you engage with them, you check them out thoroughly..
Here at Reeves we’re authorised and regulated by the FCA (Financial Conduct Authority) and that can be confirmed by looking at the FCA register, available online. We’ve been established for over 20 years and have numerous third-party references which can be viewed on Linked In and our website.
Could I be paying less in fees?
Yes, you could. If you're investing through multiple providers, you might be paying more fees than necessary. This is because some pension providers have thresholds for price breaks. Generally, the more assets you have with a single provider, the more opportunities you may have for reducing ongoing charges and lowering investing expenses.
Sharon, aged 74, is now enjoying retirement. And she saved 25% in fees, simply by consolidating to a more modern investment. She can flexibly access it, too.
Is there an upfront cost?
Yes, there is likely to be an initial cost involved in consolidation, which will come out of your pension pot. Like any other service, a financial adviser will charge for their expertise and time spent.
You must decide whether you are willing to take a small step back in order to move forwards.
At Reeves Independent we offer a free initial review of your situation. And fees only apply if you decided to proceed, so it's risk free.
Bernard recently approached Reeves. He was not happy with his current adviser. He was not justified with the investment performance or communication provided.
We demonstrated why Reeves Independent could add value to his existing arrangements and why moving to a modern investment platform would be beneficial. His current arrangement only had access to 400 investments, where as the platform has over 8000 to choose from.
At Reeves, our initial fee structure to facilitate pension transfers is 2.5% for the first £150,000 and then 0.5% for any value above. Bernard was surprised at this rate as his previous adviser charged him a flat 3% rate.
For Bernard’s £300,000 pot his previous adviser charged £9,000 for his advice and the facilitation of the transfer. At Reeves Independent, our initial fee was £4,500 which 50% less than his previous experience.We pride our selves at being great value for money.
What should I do if I have a workplace pension?
You should avoid transferring your pension and closing the policy if you are an active member of a workplace pension scheme. This is because your employer will probably be paying in money on your behalf and you could potentially lose this if you chose to stop that pension and transfer.In this scenario, assuming you do want to consolidate, depending on the value of the scheme we would suggest speaking with your employer to see if they were able to continue the pension contributions to your new plan.
Alternatively, sometimes you can partially transfer the policy leaving the minimum amount behind ensuring that the plan is still open, and the contributions will still be received
Will I lose any safeguarding benefits?
It is vital that you understand the ins and outs of your pension plan before considering consolidating.
Will you lose any guarantees or other valuable benefits?
Some Pension providers offer ‘Guaranteed Annuity Rates’ and bonuses, these can provide a much higher income than if you were to transfer the plan. Any ‘Guarantees’ are normally lost if you move a pension elsewhere.
Will I lose any protected tax-free cash?
Most people assume that they can only take 25% of their fund as a tax-free lump sum, and this is true for the vast majority of pensions.
Some older pensions taken out before 2006, allowed you to build up more than 25% of the fund as a tax-free lump sum and when the pension tax rules changed in April 2006, these higher tax-free lump sums were protected. In most cases, you would lose any higher entitlement if you transferred to another pension provider hence why taking financial advice is so important.Will I lose my protected low pension age?
People who had a right to take their pension early (from age 50) were protected when the pension tax rules changed in April 2006.
This once again highlights the importance of speaking to an adviser to ensure you understand what you potentially could be giving up.
Do you have a question? Email us at firstname.lastname@example.org.
It is important that no actions should be taken without first taking advice. Personal circumstances and an individual’s appetite for risk means that the advice for one person may not be the same for everyone. Reeves do not advise on Defined Benefit pension schemes. Reeves do introduce a third party specialists in areas of work we do not cover. Reeves run an advanced investment portfolio management service on an advisory basis only