Pension Transfers

Following on from last month’s Enews article about Pensions Awareness Day, one topic which crops up on a regular basis is whether or not to combine or consolidate previous pension schemes into one.

There is no clear-cut answer as it depends on many factors, but this month we will look in very general terms about the “Pros and Cons” of doing so.

These days the term “gig economy” is frequently used to signify a labour market involving short term contracts and freelance work. Many years ago, there used to be “jobs for life”, but nowadays people can end up with a plethora of pension pots which have been accumulated throughout their careers.

The vast majority of employees are now enrolled in what is known as a Qualifying Workplace Pension Scheme and these are what are referred to as “Defined Contribution” – or DC for short – pension plans where savers build up a pot of money. The other type of scheme – Defined Benefit (or DB) are less common now for building up an entitlement to a retirement pension, but some of our clients may still have them from previous employments. Advice on DB arrangements require specialist advice and permissions from the Regulator, the Financial Conduct Authority (FCA). As the FCA say that people should begin by assuming that staying in the DB scheme is the best option for them (partly due to the underlying guarantees), Chancellor Financial Management Limited took the decision not to advise on possible transfers out from this type of scheme.

Due to the large number of factors involved in considering whether to transfer out of previous private and workplace schemes, taking good quality independent financial advice is always recommended, but let us have a look at some of the key considerations.

• It may be easier to keep track of the overall value if all your pension funds are in one pot. Many people like to keep track of their finances online these days, so combining your pots may mean that you need to remember fewer passwords! Many pension providers also send out a paper based annual statement, so combining pots can mean you have less paperwork to contend with.

• In recent times the costs and charges of pension arrangements can be a LOT lower than those, say, set up prior to the introduction of Stakeholder pensions in 2001. Charges can have a big impact on your eventual retirement pot, so generally speaking, the lower that the charges are – the more money you will have when you finish work. It is important though to ensure that there are no substantial penalties involved in moving away but in 2017, the Government took steps to minimise these to a maximum of 1% for those over age 55, so it might be a good time to consider your options if you are near to (or over) this age.

• Some very old pensions do not always give your family good value if you die before retirement, so consolidating your plans might give them more money to live on if you pass away before you get to enjoy the money yourself!

• Some Defined Contribution pension plans contain very valuable guarantees which would be lost if the funds are moved to another pension provider, so it is important to fully understand and consider these before taking any action.

• In 2015 the Government introduced so called Pension Freedoms which gave people more options as to how to take benefits in retirement. Some old pension plans do not contain the maximum flexibility that the legislation allows, which for some people can be very advantageous.

• Some older pension arrangements (and some new ones too!) can have a limited range of investment choices whereas, say, some Self Invested Personal Pension Plans (SIPPs) can offer the full range of investments that the legislation allows, including the option of buying Commercial Property and individual stocks & shares.

• Some people do not like the idea of putting all their eggs in one basket so to speak, although there is legislation in place to protect pension pots should some things go wrong with the provider.

• Sometimes having a number of “small pots” of less than £10,000 each at retirement can be advantageous from a flexibility point of view, so this is something that you and your adviser should think about carefully when looking at combining several pots into one.

The value of your investment can fall as well as rise.