Exercising your pension transfer options by moving your pensions to a new provider could provide a significant boost to your investments. Doing so might even allow you to retire earlier.
It’s commonplace for people to shop around from bank to bank to get the best savings rates for their money. We’ve wised-up to the fact that the attractive returns that entice us to open an account don’t last forever. We know that two years in, rates will likely have fallen through the floor.
However, for some reason, people frequently leave their pensions invested with their original provider. They never check to see that their investments are still performing as they should.
Your pension transfer options explained
Interested in getting better investment returns on your pension fund? You can move your retirement savings to any type of pension including a:
- Personal pension
- Self Invested Personal Pension (SIPP)
- Stakeholder pension
- New employer’s occupational scheme
You don’t need to move all your pension funds to a different provider. You can choose how many you move, and to where.
How pensions get charged
When you move job your pension, if you had one, becomes “frozen” and your contributions cease, together with any made by your employer. However, your funds remain invested, hopefully growing year by year until your retirement.
Managing your pension requires some effort on the part of your provider. In return they levy an “Annual Management Charge” to your account each year. This is typically calculated as a percentage of your invested funds, although there may be additional fixed charges. These charges continue even though you are no longer making contributions to your pension.
Your current pension providers may no longer be competitive
The service delivered by your pension providers from previous jobs may become less competitive over time. Your pensions may suffer from increasing charges and reducing returns.
Many of these schemes will be old, closed to new business and rely on your inertia to get away with charging more than the current market rate. It’s just like the way interest rates on savings accounts with your bank deteriorate over time.
Consider someone with £100,000 in total pension funds, invested equally with four different but also uncompetitive providers. Each levies a 1.25% Annual Management Charge and £38 fixed fee against the £25,000 invested in their fund. Add these up and the total management charge is £1,402 a year.
Compare that to having all £100,000 invested with a single provider. With a more modern plan, having all the funds in one place should result in a lower Annual Management Charge of perhaps 0.65% per annum, annual product charge of 0.42% plus £80 in fixed fees. The charge has been reduced to just £1,071 a year.
And it’s not just the charges that become uncompetitive with older schemes. Once these schemes close to new business, the performance of these plans can also take a tumble. It’s commonplace to see older schemes making average annual investment returns as low as 2% compared with more attractive returns of 7% for newer, high-performing funds.
You can significantly improve your prospects for better returns by moving away from funds which have just been “plodding along” in favour of “best of breed” funds which are proactively managed for market leading returns.
Of course, it’s choosing the right funds which is the hard part.
The impact of low performance and high charges on your pension fund
The negative effect of poor fund performance and high management charges should not be underestimated.
Take for example a 45 year old with four £25,000 pension pots from previous jobs who keeps those invested with their original providers until age 65. Those providers’ funds achieve 2% annual investment growth and they each make charges totalling 1.4% of fund value every year. Inflation averages the Bank of England’s target of 2% over the 20 year investment period. On retirement, the pot will be worth £111,446, that’s only £75,921 in today’s money!
The same £100,000 invested in a single, modern, high-performing fund that achieves 7% annual investment growth over the same period, with 1.1% total annual charges, will be worth £199,672 in today’s money – more than double the original amount.
You can use this handy retirement calculator to help you adjust these figures to your own circumstances.
Effect of getting control of pension performance on future fund value. Top line = High performing fund, Bottom Line = Poor performing fund
A better return can never be guaranteed but lower charges and more investment choice will give you the best chance of achieving an early retirement.
The Pros and Cons of consolidating pensions
If you’re lucky enough to have participated in a final salary scheme at a previous employer it will generally make sense to keep that pension where it is. But if you have any other type of pensions, where your comfort in retirement depends on the performance of your investments, moving them to a single provider is worth considering.
- You can see exactly how much you’ve saved in total into your pensions – and can decide if you need to save more.
- It’s easier manage your pension if your whole fund is in one place.
- It’s easier to spot if a particular fund is performing badly and switch over to a better performing fund.
- Some providers charge high exit fees when you transfer old pensions away from them and this can eat into your investment.
- Some older pensions include guaranteed annuities or “Protected Tax Free Cash” that you would lose by consolidating. Advice is essential before agreeing to transfer any pension.
- You would no longer be guaranteed a specific income if you leave a final salary scheme or a pension which includes a minimum pension guarantee.
Remember that pensions are a long term commitment and you may not be able to access your pension funds until the age of 55. Investments can go down as well as up and you might not get back your initial capital. Pension and tax legislation does and can change in the future which could impact your pension.
Are you frustrated by the returns from your old pension scheme? Are you thinking about using your pension transfer options to improve your investment returns? Comment below to ask any questions you might have.