Considerations When Consolidating Pensions
There are a number of factors you should take into consideration before consolidating your pensions, including the fact that it may not always be the best idea to do so.
Some pensions could be better off left where they are, such as those with attached guarantees (e.g. a guaranteed annuity rate).
Other times, such as with a final salary pension, it may not make sense to bring it in with the rest of your pension savings all in one pot.
Pension Consolidation Fees and Charges
It is very important to be clear about the financial implications of moving your fund. You may face a number of charges for doing so, including:
- An exit penalty for leaving the fund early
- Higher charges at your new pension scheme
- Charges to start a new pension.
Your previous employer may also try to persuade you to leave the fund by giving you an enhanced transfer value — a bonus on the actual value of the fund. However, this might not be a true equivalent to the benefits you are giving up, which could see you lose out.
That’s why you should make sure you understand your options before you make any moves to transfer pensions, and why getting financial advice on pension consolidation could be of incredible value to ensure you don’t fall foul of these fees or get short-changed.
How Have My Funds Performed?
Before you move, look at how the funds your pension money is invested in have performed. If they are performing poorly or are in closed funds no longer open to new members, then it may be time to leave in search of better growth.
Where is My Pension Pot Invested?
Some pension funds automatically switch your investments from equities (shares) into fixed interest rate products such as bonds and gilts over the 10 years before your chosen retirement date.
However, if you are planning to leave most of your fund fully invested, then the potential growth will be affected if you’re in more cautious investments. It might be worth reviewing these and discussing your options with an adviser to make sure the funds are invested in the right place to match your needs.
Moving Pensions to Funds That Allow Drawdown
The 2015 pension freedoms offered a wider array of options for those looking to access their pension pots and make retirement provisions.
This includes opening up the option of pension drawdown (or income drawdown) to more people with defined contribution pensions.
However, not all funds allow drawdown and you might have to move to a new fund that does if you want to consider this as an option for providing retirement income.
As with all long-term decisions affecting your pension, it’s best to get financial advice on income drawdown to see if it’s suited to you. You need to be aware that if you take too much of your pension too early and / or live longer than you were expecting, you could run out of cash.