The days of spending your whole career working for one company – and paying into a single pension pot – are over. Auto-enrolment laws mean that many people have a number of smaller workplace pension funds and some larger companies offer defined benefit pensions too. As well as making retirement planning harder, this potentially loses you money. Pension Consolidation might not just make things easier but could be profitable, whether you choose income drawdown or an annuity.
1.) Reduce your fees!
The value of a pension rests on the concept of compound interest. As with any investment, what seems like a small change in interest rates has a big effect in the long term. Have a look at our pension calculator to see how this applies to you. If you’re 50, for instance, and have a total pension pot of £70,000, moving from a 2% annual charge to a fund with a 0.5% charge could grow your pension by an extra £26,412! by the time your 65 years(1). Whether or not you take the tax free lump sum cash, this is a significant difference.
2.) Keeping track
Retirement planning can be complex enough as it is. Combining your pensions makes it much easier to monitor your investments, and to estimate your final income or tax free lump sum cash. Many providers allow you to do this online. Moving everything into one pension may spark your memory to those old workplace pensions you may have forgotten about: the Pension Policy Institute estimates that 1.6 million pensions – adding up to £19.4 billion – are unclaimed.(2)
3.) Better investment
Combining your pension could not only save you money on fees – it can help you earn more. Switching to a plan with a lower charges could make you thousands of pounds, and the earlier you do this, the better. Once again, it’s all about compound interest, and will have a big effect on the tax free lump sum cash that’s available. Consolidating into a fund with better investment options can also offer you more security. A pension plan you invested in 20 years ago might not offer the best performance as the potential options available today.
4.) Income drawdown prospects
You may have considered pension drawdown in your retirement planning. This means that you make withdrawals from your pension pot whenever you need it. The fund itself stays invested, meaning it can continue to grow. Sometimes there is a charge for withdrawals, so it makes sense to consolidate and take income drawdown from a single, larger fund. Some providers will also not allow pension drawdown unless the fund is of a minimum size, or don’t offer it at all. Consolidating your pension, therefore, could give you access to a greater range of options.
5.) More choice
The pension freedoms introduced in 2015 have allowed savers to take advantage of income drawdown, the lump sum, and other benefits. Not every contract, however, allows access to this. You can, therefore, consolidate your pension and move to a provider that offers what you want. For example, some will be interested in a Self-Invested Personal Pension (S.I.P.P.). Even if you plan on buying the traditional annuity, consolidating your pension gives you the chance to choose a plan that suits your wishes.
(1) Figures based on comparisons between pension policies charging 0.5%, 1% or 2% annual provider charges. Pension fund value assumed 5% annual growth. This calculator is for illustration purposes only. Please note investments can go down as well as up.