Ten years ago retirement and access to your state pension for women was age 60, and for men 65, but in the last few years, changes have been made to bring both qualifying ages in line, and a phased increased for both sexes. Today, you need to be 66 to retire and access your state pension, but this will increase further to 67 between 2026 and 2028 and then to 68 between 2044 and 2046.
As a result, for the majority of the workforce, they’re going to be working for thirty to forty years to support their family and save enough money to retire. If you’re working for forty years, you’ll more than likely work for a few different employers, and sign up for various pension schemes.
Research shows the average worker in the UK, works for six companies between the age of 23 and the current UK retirement age of 66. While at these six different companies, the average worker is likely to sign up and pay into a company pension scheme. When it comes to retirement and more importantly growing those saving plans, would not be better to have all your pension plans in one place?
Should I Consolidate My Pensions?
Before you start combining pension plans, there are a few things you need to understand. Firstly, what type of pension plan do you have? What are the costs involved? Do you get any other benefits from leaving your pension where it currently is located?
As an example, if you have a defined (final salary) pension that pay’s you a guaranteed income at retirement, and increases each year with inflation. While the amount that you’ll receive depends on the how long you have been with the program, and your average salary during the plan, it rarely makes sense to move this type of pension elsewhere. Combining schemes can make sense in some instances, but again you need to be very careful you’re not losing essential benefits.
If you have a standard workplace pension, you must make sure you check the small print before you start combining them together. Often workplace pensions have valuable benefits that are worth having such as tax-free cash sums above the standard 25%, protected pension age allowing you to access your money earlier than the current minimum of 55 or even a guaranteed annuity rate, which is particularly valuable today given the low interest rates that we used to today. If you have any of these, or any other benefits, its worth understand how they are worth, and what the real cost to move that pension.
Charges & Exit Penalties
Once you have understood the type of pension plan your thinking to consolidate, the next thing to consider is the charges involved. Generally, there are two types of costs involved that you need to consider, exit penalties for transferring your pension, and annual management fees.
Typically, pre-2000, pension plans used to charge an annual management fee of 1.5% to 2%, which is steep when compared to the latest plans. Remember, this is just a yearly management fee, after which you would still have fund fees. The newest retirement plans often charge a combined platform and fund fee of 0.5% or less.
This allows you to save as much of your investment growth as possible.
Exit fees are also a possibility. In the past, research showed that some employer schemes impose a maximum exit charge of up to 24%, which would take a considerable chunk out of an individual’s pot.
Fortunately, new rules allow for exit fees to be capped at one percent. You need to work out exactly how much it’s going to cost you to transfer your pension and whether this worth it considering the value.
It’s worth looking at investment performance and how your pension fund is actually performing. Most pension funds are risk-off, i.e. they invest your money by taking minimal risk.
The problem is that by taking minimal risk, the returns are often meagre. What you’re really looking for in a pension fund is one that invests your money in riskier investments the longer you have to go before retirement, then gradually moves them into less risky investments such as bonds and cash as your retirement date approaches.
This way to you maximise your investment return. If one of your pension plans has produced meagre returns compared to the others, possibly it could be time to move it to another pension plan.
Remember, if you invest £250 per month, from the age of 23 to the state retirement age of 66, and it grew by 6% each year, you would have a pension pot of £617,252. If you increase this to 8%, it would be £1,113,683 and 10%, a massive £2,055,818.
If you do decide to move your pension plan, you need to consider your options carefully. The number one reason why people consolidate their pension plans, is for great access and options when they come to retire. Up until recently, pensions were designed where you and your employer would pay monthly into them, they would grow over the years, and annuity would be bought at retirement age, allowing for an inflation proofed income for the rest of your life.
The problem is with annuity rates decreasing with interest rates, buying annuity is no longer as profitable as it once was in the past. Today pensions are designed to still take advantage of annuity if the users choose, but also possibly an Income drawdown, or flexi-access drawdown to take money from your pension plan.
If you’ve been on an older style pension, it can make sense to transfer your pension to a newer platform where you can achieve better growth, but most importantly, have better access to your funds.
If you’re planning to transfer a pension with a value above £30,000, its compulsory to speak with and get sign off from a financial adviser, under rules set out by the Financial Conduct Authority.
That said, in all honesty I would always advise speaking with a Financial adviser to understand whether it’s a good idea to consolidate your pension plans. If you need help finding a qualified financial adviser, look at unbiased.co.uk or vouchedfor.co.uk, or if you’re over 50, you can get free pensions guidance from Pension Wise.