When UK employers first introduced pension schemes en masse in the middle of the 20th century, they did so in a context in which people stuck with their careers for life. At the time, remaining in the same job until you were of pensionable age was the cultural norm.
But thanks to shifts in the labour market, that’s no longer the case. People are hopping from one job to the next every year, making the task of managing their personal pensions much more difficult. Today, workers have money in multiple pension pots (usually one from each of their former employers), not a single large, centralised fund they can easily manage.
Theoretically speaking, splitting up a pension into multiple pots with various providers or any greater degree of diversification doesn’t matter, if the registered pension scheme is structured correctly. Also the rate of capital growth is not related to the size of any particular holding. But, on a practical level, it can be difficult for the individual to keep track of and some individuals or scheme members are known to lose track of their pension plans!
After reading this article you should understand:
- The benefits of consolidating all of your individual pensions into a single, larger fund
- Some of the drawbacks of consolidated options
Critically, when it comes to pensions, you need to make the right decision for your circumstances. Pension consolidation is not a one-size-fits-all approach. So should you consolidate your old pensions? Let’s find out.
Why People Combine Pensions
Accessing Better-Performing Funds
Typically, pension fund managers are conservative investors. They try to keep risk as low as possible in order to preserve their clients’ principle – the money they originally deposited in their accounts. Given this reality, they naturally tend to invest in securities with low risk and low returns – think government bonds, corporate bonds, and low-growth, dividend-paying equities.
For many people, this strategy is reasonable. It’s better to take a little risk and have some money in your retirement account than a lot of risk and have none. But for many, the risk-reward ratio isn’t worth it, and they’d prefer to take on more risk in order to get higher returns.
Unfortunately, when you invest in multiple pension funds, you can’t always calibrate your risk exposure level to your preferences. Furthermore, trying to juggle multiple pensions with cross-correlations and overlaps makes it really hard to determine your current risk position. You might think you’re well diversified, but if funds correlate with each other, then the risk of your whole pot crashing in value goes up.
Pension consolidation also allows you to take advantage of progress in financial theory. Today, for instance, there are good theoretical reasons why factor-weighted equity funds may outperform the market in the long-run which simply didn’t exist in the past. So by simply updating your pension’s asset mix, you may be able to improve your risk-adjusted returns.
Lower Fees
Consolidating your pension fund doesn’t necessarily lower your fees, but it can help. Each pension fund provider takes a percentage of the money you have in your fund every year to cover their costs. These fees pay for the overheads of the pension management firm, including their labour costs, buildings, computers, analysts and so on.
However, as in any market, prices aren’t uniform. You can find some great value pension funds who only charge one percent annually, while others might go as high as three percent.
Keeping track of all these fees is a nightmare. And, quite frankly, most people don’t bother. But, mathematically, even slight differences in prices between pension funds can have massive ramifications on the long-term value of your pension pot. So keeping them low is critical.
Furthermore, some pension providers will also tack on extra fees in the small print. These can include account inactivity fees, transfer fees and management fees.
By contrast, consolidation makes pricing much simpler. It clearly shows you what you are paying and how much your pension is likely to cost you long-term. It also makes it easier to compare your options, allowing you to quickly and easily figure out which provider offers the best value.
It’s Easier To Keep Track Of Progress
How much money you have in your pension determines the age at which you can retire. So being able to keep track of your investments is critical. Failing to do so prevents you from working out how much you need to save to hit your financial targets by a certain age – say, 65.
Unfortunately, knowing how much money you have put away is a challenge for those who hold accounts across multiple providers. Yes, theoretically, you can manually sum each pot to get your total funds. But practically speaking, this is easier said than done.
Having just one pension, however, removes this difficulty. It’s easy to see how much money you have in your pension pot right now, and how much you’re likely to have once you come to retire.
It’s Easier To Manage
Managing multiple pension accounts can become a little tedious after a while, especially if you have ten or more all running at the same time (as many people have). You may find yourself continually writing letters to pension providers (if you like doing things the old-fashioned way), or logging in and out of their online portals – a massive hassle. Furthermore, you also have to deal with their individual approaches to risk, which makes it hard to calibrate your overall risk exposure optimally.
By contrast, consolidating your pension allows you to take back control. Diverting all your money in the same place puts you back in the driving seat and allows you to make better decisions. Do it right, and it may let you:
- Improve your investment returns
- Expand your range of choices
- Choose assets that actually reflect your long-term financial goals instead of settling for the pension fund’s default choices
Why Pension Consolidation Isn’t Always For Everyone
Pension consolidation isn’t for everyone.
Loss of Benefits
Some pension funds offer safe-guarded benefits that you can only access if you continue the pension until completion. If you decide to cash out early, you may lose your:
- Defined benefit or final salary
- Guaranteed annuity rate (a minimum fixed annual income paid using the interest accumulation on your pension savings)
- Guaranteed minimum pension (an old form of pension benefit that applied to some pensions set up prior to 1997 that allowed employers to save on their national insurance bills by promising a fixed retirement income for staff in the future)
- Guaranteed conversion option (which allows you to convert life and critical illness cover into a new whole life policy or endowment)
- Early access to funds in your pension
- Guaranteed pension growth rate
Please note, that if your defined benefit pension offers a final salary of £30,000 or more, then you need to seek independent financial advice before you can transfer out of it. Contact BulbFin today.
Exit Fees
Many providers also charge you high exit fees if you want to transfer your old pension to a new product or consolidate your holdings, including many schemes begun before 2001. Usually, the amount you pay is a percentage of the overall value of your account. So, if the fee is 3 percent and your account is worth £500,000, you’ll wind up paying £15,000 to the provider.
Some pension providers offering “with profits” funds will charge you in the form of a market value reduction, or MVR. These terms are designed to protect other members of the pension fund from those cashing out when the market is down, including pension consolidators.
For this reason, pension consolidation companies, like BulbFin’s advisers, will always inform you of any exit fee costs that you’ll have to pay if you decide to move your pension to the adviser’s firm. Even though these fees might sometimes seem a little high, it is critical to consider long-term outcomes. Even high fees today can be worth it if it allows you to make better investment decisions over the long-haul.
If you’re stuck with your pension planning, get in touch. We can talk you through the costs and benefits of the transfer, showing you the path that is most likely to improve your finances.
The Consolidation Process
So what actually happens when you merge your pensions with us?
Firstly, you provide us with information on your current pension plans, their names and policy numbers. Usually, you can find this information on old statements or via your online pension portals.
If you’re struggling, just call up the pension provider directly, ask them for your account information, and then write it down. The more information you collect, the easier it will be for us to begin the consolidation process.
Once you provide us with the necessary information, we can do the rest. We contact your providers, find out how much it is going to cost to transfer out of your current plans, and then present you with your options. If you decide to go ahead, we will construct a brand new pension plan that amalgamates all of your money into a single account, ready to invest according to your goals and circumstances.