On average, British workers can expect to acquire 11 different pension plans during their working life*. This can make keeping up with them all quite a headache. To help us keep abreast of our pensions, the Government is encouraging the pensions industry to create a digital dashboard which will provide a summary of each person’s pensions in one place. The prototype is expected to be available by 2019.
LEBC supports this initiative as we believe it will leave consumers better informed and help us to cut the cost of advice. Enthusiasm amongst pension providers is mixed, with some keen to join in and others dragging their feet. The Department for Work & Pensions is hoping to get this established on a voluntary basis but may be willing to legislate if need be.
In the meantime, one of the most common questions we are asked is, “Should I consolidate all my pensions?” The answer depends very much on personal circumstances, the type of pensions owned and the terms attaching to them. In some cases there are benefits in consolidation, such as lower charges and better investment options but transferring pensions can also result in loss of valuable benefits.
Here is a quick guide to the main things to look out for:
- Defined Benefit, Career Average and Final Salary Schemes all offer a guaranteed lifetime income payable from a set age. This can also include an income for eligible dependants, should they survive you and regular increases in the annual income. These are valuable benefits and generally should not be given up, unless personal circumstances mean that the timing and shape of the benefits do not meet your needs. Even then, you need to be sure that alternative pension arrangements will leave you in a better position than continuing in membership of the pension scheme and using other assets to meet your specific needs.
- A common mistake is to dismiss the value of these types of pensions if they were earned many years ago, when the salary they are based on was much lower than current earnings. For all pensions earned since 1988, the annual pension payable has to be partially inflation proofed from the date of leaving till it starts to be paid. It will then receive annual increases thereafter in most cases. So even though the period of employment may have been short and earnings much less than today, these pensions could be worth considerably more than they were at the date of leaving employment. Where the value of these pensions is £30,000 or more, regulated advice must be taken before they can be transferred.
- The other type of pension, known as money purchase or defined contribution includes both employer sponsored schemes and private pensions. Generally these do not provide a known level of guaranteed income but are a fund of invested money. The key factors to consider, before consolidating them, are the charges made for the ongoing investment of the funds and the investment options available. Charges can vary considerably and higher charges can eat into the eventual fund value. Restrictive investment options or poorly performing investments will also detract from the value.
- There are some money purchase pensions which do offer guarantees and these can sometimes be worth more than the fund value would suggest. This includes some plans known as buyout plans and retirement annuity contracts. These should only be consolidated after the value of the guarantees offered have been assessed against your needs. Professional regulated advice may be needed to make this assessment.
- For plans arranged before 2015 it is also important to check whether the rules have been updated to include options introduced then. These allow the pension to be:
- drawn on a flexible basis
- to continue to be invested beyond age 75
- left on death with funds to be retained in the tax exempt pension wrapper by your nominated beneficiaries, rather than being paid out as lump sum within 2 years
Finally small pensions (less than £10,000) can be worth retaining rather than consolidating, if it is anticipated that other pensions will use up most of the lifetime allowance (£1,030,000). Up to 3x £10,000 may be cashed in with 25% paid tax free and the balance subject to income tax. These do not count towards the lifetime allowance. However to qualify there must be some lifetime allowance left, when these small pots are withdrawn, or they will suffer extra tax charges. For the majority, without lifetime allowance issues, the consolidation of small pots is often beneficial by reducing both charges and paperwork.
Getting an overview of all your pensions can be the first step to planning a successful retirement, if you wish to find out more please do get in touch with us.
Director of Public Policy, LEBC
*Research completed by Department for Work and Pensions (DWP)
Please remember, no news or research item is a recommendation or advice to buy. LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment or product for your circumstances please contact an adviser. The Financial Conduct Authority does not regulate tax planning / will writing.
Back to News & Views