Most people are likely to have number of old pension pots scattered around and often many of these will be older, less flexible, and with high fees. With rising average life expectancy, the increasing state pension age and the move away from gold plated final salary schemes, it’s important to make sure that these plans are working for you. The smallest change can make a huge difference to your income in retirement.
Typically, there are five main reasons people would want to consider consolidating their pensions in one place – simplicity, lower charges, better service, more flexibility, and wider investment choice.
Transferring your pension pots and consolidating them all under one roof in a modern contract not only means that you can keep track of and monitor your pension savings more easily, but potentially you could also benefit from lower charges.
A high proportion of older, less flexible plans may now be closed to new business, which means that providers are very unlikely to want to invest in improvements to either their service or their offering.
Modern contracts are also likely to offer more flexible withdrawal options together with a wider investment choice compared to some older contracts that may only offer limited investment options.
There are however some points to watch out for before you transfer and consolidate your benefits. The first is to check if there are any exit penalties or charges to transfer out of the old scheme as clearly this may negate any benefit in transferring.
Another issue to look at is whether you would lose any valuable guarantees or benefits on transfer. Some older schemes, for example, offer generous guaranteed annuity rates (GAR) which could typically be around twice the current annuity rate for someone in good health. Whilst this can be a hugely valuable benefit, the downside to a GAR is that people need to buy an annuity which may not suit their needs. Hence keeping a plan with a GAR may not be suitable for everyone but nonetheless shouldn’t be given up without careful consideration.
Some pension plans, where benefits were built up before 2006, may be entitled to a tax-free cash sum above the normal 25 per cent. However, in most cases, the higher tax-free cash will be lost on transfer to a new plan.
A pension is a long-term investment not normally accessible until 55. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested.
In summary, consolidating your pensions into one modern contract is likely to be a good idea for many, but there are some situations where remaining in the older contract may be the best option.
If you are looking for expert financial advice to help you make the most of your existing pension portfolio, please do not hesitate to contact us for an initial no obligation consultation at our cost.