November 2, 2015
Many of us have paid into several different pension schemes over the years, does it make sense to consolidate them?
If you have acquired several workplace pensions over the years the likelihood is you’ve got no idea how some or all of them are performing. It’s easy to forget about them and hope you’re in for a nice surprise at some point in the future, but we shouldn’t have our retirement funds languishing in expensive or underperforming pension funds.
Consolidating your pensions into one well-performing fund could be a way to make your money work harder and more efficiently for you. This could have a huge impact on your retirement lifestyle or retirement date.
Whether it is prudent to consolidate your pensions depends on your specific circumstances. If you’re in a final salary scheme it almost always makes sense to stick with it, but if you have other types, where the pension value depends on the performance of the pension fund’s investment portfolio, consolidation may be an option worth considering; reducing fees and making your retirement fund easier to track and manage.
Before 2013 pension advisers could receive annual commissions on their clients’ pension funds, called ‘trail commissions’. While advisers cannot be paid commission on new investments they can from investments made before the change.
If you’re still paying commissions to pension advisers, consolidation could help to resolve the issue. Advisers can still charge annual fees but they must be providing an ongoing advice service in order to do so. Newer pension schemes tend to have lower charges, thanks to stakeholder pension management charges being capped in 2001, for example.
As retirement approaches
As retirement age approaches many of us want to protect the value of our investments against market volatility. ‘Lifestyling’ is the process of gradually transferring investments out of more speculative investments such as equities into cash and safer, fixed-interest investments.
This is not an automatic process for most pension funds, but if you’re currently in this process or would like to start it soon you should find out about charges involved in transferring the pension to a different provider. Some transferring services are offering to cover exit fees from current providers, albeit up to a maximum.
If you are approaching retirement age and want to protect your retirement fund it might be more appropriate to switch to lower-risk investments with your existing pension provider, many of which will offer internal transfers free of charge.
Combine pensions pots for retirement income
When the time comes that you need to rely on a pension for regular retirement income you can buy an annuity. It can be difficult to find a good one with smaller pension funds, so if you’re at retirement age it might make sense to consolidate several smaller pensions into one to get a better annuity, with lower charges, broader investment options and/or a better annuity rate.
Tap the potential
When your retirement income is too low to allow you to live comfortably, tapping into your home equity may be a good way to solve the problem. You might consider doing so the traditional way, but a standard mortgage will create another bill you have to pay. A reverse mortgage will provide you with money without creating an immediate bill. The way such a loan works is a reverse mortgage lender provides you with cash taken from the value of your home. In exchange, you agree to use the home as your primary residence for as long as the loan lasts. Until you leave the home, you are not obligated to repay all of what you borrow. Therefore, you can enjoy your retirement with the financial stability you need and no added stress.
Consider carefully what stage your pensions are at and whether it could be improved by smaller fees and charges as a result of consolidation. Consult independent advisers about your situation as they may be able to help you understand the implications of any transfer.
Be sure to check every detail to ensure your new consolidated scheme will offer better value for money through better investment or a reduction in charges.