On average, British workers can expect to have 11 different pension plans during their working life*. This can make keeping up with them all a headache. Latest estimates show nearly £20 billion is abandoned in unclaimed pension pots(1). The Government is requiring the pensions industry to create a digital dashboard which will provide a summary of each person’s pensions in one place. This is expected to be available from 2021 but may not contain all pensions by then.
LEBC supports this initiative which will leave consumers better informed and make planning for retirement easier. We have launched an app, Hummingbird, which can store and track all an individual’s savings, pensions, debts and spending in one handy place. More information on that is here. The Government also runs a tracing service for lost pensions here.
To Transfer or Not To Transfer?
One of the most common questions we are asked is, “Should I transfer all my pension pots into one plan?” 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 better off than continuing in membership of the pension scheme.
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 must 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 on leaving employment. Where the capital value of these pensions is £30,000 or more, regulated advice must be taken before they can be transferred.
Money Purchase or Defined Contribution includes both workplace schemes and private pensions. Generally, these do not usually provide a known level of guaranteed income but are a pot of invested money. 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. Poorly performing or restrictive investment options will also detract from the value.
Some money purchase pensions do offer guarantees and these can sometimes be worth more than the monetary 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. 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 within the tax -exempt pension wrapper to your nominees.
Small pensions (up to £10,000) can be worth retaining rather than transferring. They can usually be cashed in without triggering restrictions on future pension saving which apply when a larger pot is cashed in flexibly.
If it is anticipated that other pensions will use up most of the lifetime allowance (£1,073,100), bear in mind that up to 3 small pots (from personal pensions, retirement annuities etc) and an unlimited number of occupational small pots may be cashed without counting towards the lifetime allowance. 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)
1. Association of British Insurers estimates May 2020 1.6 million unclaimed pension pots with an average value of £13,000.
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.
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