If you have had worked for several companies over the years it can be difficult to keep track of all your old work place pensions and importantly how they are performing. There is also a real danger that these “frozen” plan will be gathering dust in expensive to run and poorly performing funds – But the confusing paperwork that you receive annually is probably enough to put you off getting involved in what can be an extremely complicated research journey, even if you know where to start.
I would like to take this early opportunity to point out that switching your pension is not always the best option, its not without its potential pitfalls. A good financial adviser will explain all of the risks to you should you wish to get your own circumstances assessed. With investments its important to understand that the value can go up as well as down.
Its time in the market rather than market timing
Making the most of your pensions now and maximising the potential growth can have a significant impact on your income/lifestyle in retirement. Compound interest (gaining interest on your interest) can have a massive impact on how your retirement fund grows – Success is ultimately determined by the performance of your underlying investments – As such it may make sense to have these “by design” rather than “by default” which will the outcome of leaving them where they are.
The impact of charges
Many of these frozen pensions may still carry high fees and you are most likely not receiving any advice on your pension investments – Post the Retail Distribution Review (RDR) all fees and charges are much more transparent – There are still fees but they are not hidden anymore and it makes it easier to compare options – Take the following example:
35 year old with a current fund value of £100,000 invests until 65, the fund performs at 5% annual growth, but charges a fee of 2% just for the annual management (no advice) – The fund will be worth approx. £237,200 at retirement.
The same £100,000 invested into a fund that performs at 7% but only charges 1.5% will be worth £485,410 – More than double. A better return can never be guaranteed, but more appropriate investment choice, such as that offered by a financial adviser, may give you the best chance of achieving one.
A SIPP (Self Invested Personal Plan) can provide a huge amount of investment choice and if use in the correct manner can act as a good tax wrapper for someone looking to consolidate into a personal pension. SIPP’s have been given a bit of bad press recently due to the investments that have been placed into them, rather than the SIPP themselves – For example people being advised to buy something like Australian farmland, car parking spaces etc and place them into a SIPP. The issue is with the SIPP it’s the assets that are in the SIPP that are questionable. Most adviser will stick to the main assets classes – Cash, Fixed Income (Bonds and Gilts), UK Commercial Property, Stocks & Shares. If in doubt get a second opinion.
Consolidating when you are reaching retirement
When you are in your 50’s or 60’s you pension pots (if you have been investing for a reasonable time) should have appreciated massively, and you may decide that that the fees for advice may act as deterrent to act – You will have less time to recoup the cost before you retire.
HOWEVER you may find that your plan is not “retirement ready”, and that you might need to transfer out before you can start taking an income from your fund at some point, plus you may not be happy with your existing arrangements and your funds may be underperforming. You may still have 10-15 years to work and transferring now gives you the added benefit of simplifying things for when you actually want to start or phase in your planned retirement.
As part of your review a good financial adviser will write away to all of your existing providers, then present all the findings to you, including;
- How your funds are invested and whether they meet you current attitude to risk
- Does the current fund have any benefits or guarantees that you would lose by transferring
- Performance of the funds in terms of returns
- Costs of the investment including fees and charges
- Exit fees or penalties on current funds
- Options to transfer to alternatives (if suitable) within the current product
- Current transfer values
- Does the contract allow flex access (is it “retirement ready”_
- Are there enhance tax free cash entitlements
At the end of the day the transfer needs to make sense, and the advisor should also be ascertaining that the cost of moving the pensions to the new product can be comfortably made back by the performance of the new investment versus the current provision – Thus ensuring that you are not in a worse position.