Consolidate your pensions
The days of a job for life, and a single pension to go with it, are more or less over. Life is much less tidy these days, with many of us changing jobs as many as 10 times in the course of our working life.
This means, if you've joined some or all of your employers' pension schemes along the way, you have probably left a trail of bitty pension pots behind you.
Tom McPhail, head of pensions research at broker Hargreaves Lansdown, says there are now more deferred occupational pension accounts belonging to former employees in the UK than there are active pensions still receiving regular contributions.
"There's no hard data on the average number of pension accounts people accrue," he says, "but we can make a rough estimate that if you have a pension and haven't yet retired or consolidated them, you'll have an average of two or three."
So what happens if you don't do anything about tidying up your pension portfolio?
If it's held in a money purchase scheme (also called a defined contribution scheme), as most occupational pensions are these days, the money will remain invested – and hopefully growing – in the pension funds you selected, until you start taking benefits.
If you didn't specify any particular fund choice when you set it up, as 80% to 90% of people don't, your money will be in the scheme's default fund.
In principle, there are several strong arguments for pulling old pensions together into a single account.
Perhaps the most significant for most people, is the fact that it can be difficult to work out how much you've actually got when your holdings are scattered around.
"Clients get a huge amount of paperwork from different companies, with separate statements for pensions and for protected rights funds, usually in different styles so they can't easily make direct comparisons," says Neil Mumford, director of specialist adviser Milestone Wealth Management.
"It can be very confusing, so they need help working out what they have got, and then they need to simplify the situation and cut down on the paperwork."
Another problem is that circumstances change: companies get taken over, pension schemes are moved from one insurer to another, and the insurers themselves may be bought out or merged.
As a consequence, it can be hard to keep track of who's running your pension and of how good a job they're doing.
"People do lose track of their pensions, so it's good to know exactly where everything is and who is managing it," says Allan Maxwell, director of the Corporate Benefits Consultancy.
High charges may be another factor that should encourage you to move your pensions, says McPhail. "The old personal pension charges, in particular, can seem pretty hefty compared with stakeholder pensions."
It may also be the case that you just don't like the limited range of boring pension funds available and want greater control over how your money is invested.
In short, consolidation is generally about greater choice, better value for money and easier organisation.
Is is always a good idea?
There are various circumstances where moving your pension is much less likely to be a good idea – most obviously if it's a final salary scheme.
"Final salary schemes should generally be left where they are, because they offer strong guarantees and it's very unlikely that the transfer value will compensate for the benefits you're giving up," says McPhail.
However, even with final salary arrangements, it may be more sensible to move your pension if it's worth a lot and you're worried about the solvency of the company.
Under the terms of the Pension Protection Fund, which compensates pension holders if an employer goes bust, ex-employees under retirement age would receive no more than 90% of their original pension, so it could make financial sense to take the hit on the transfer value.
"It's really important to get professional advice in this situation – it's possible to do a critical-yield analysis which will tell you how fast the new scheme will have to grow in order to match the benefits you're giving up," McPhail explains.
Maxwell adds that a client's individual circumstances may also favour transfer out of a final salary plan.
"These schemes usually pay benefits at the age of 65 and also pay a spouse's pension after your death – but if you're in ill health and aren't married, it may be preferable to move it to a more flexible arrangement where you can access the money earlier," he says.
Leaving aside final salary schemes, however, there are other occasions where you're generally better off leaving your pension where it is, so it's really important to get expert help and ensure each individual pension policy is scrutinised carefully.
In some cases, these may be to do with the terms of the policy. "For example, some older money-purchase policies dating back to the 1980s offer very generous guaranteed annuity rates which you'd lose if you moved your money," says Maxwell.
"It may also be the case with these older policies that you're allowed to take more than 25% of the fund as a tax-free lump sum. I had a recent case involving a pension dating from the 1970s which allowed the client to take 50% as tax-free cash."
In other cases, the charging structure is a problem. Exit penalties – in the worst cases amounting to 10% or 20% – are widely imposed, making it less cost-effective to transfer out.
In with-profits policies, these can take the form of a market value adjustment (MVA) that reduces the payout; in unit trust investments, a charge may be applied to cover the costs of the annual charges lost by the pension provider as a result of the transfer.
So before you transfer anything, contact each deferred pension provider and check what the transfer value will be and what the penalties are.
If consolidation still seems a good idea, a specialist can tell you which policies, if any, should be left where they are. The next question is where to transfer the rest to.
Where should you go?
For sheer simplicity, the best option is a stakeholder pension with a limited choice of funds and capped charges.
McPhail recommends Standard Life and Aviva's stakeholders: "They offer a reasonable range of funds, and annual management charges are below 1%."
If you're more interested in investment freedom, then a low-cost self-invested personal pension (SIPP) provides access to the full spectrum of funds, as well as other investments such as direct equities and exchange traded funds.
Conventional wisdom has been that you need at least £50,000, and ideally £100,000, to make a SIPP cost-effective, because of the charges of the wrapper itself.
However, as McPhail says, "online SIPPs can now be cheaper than a stakeholder pension".
Several providers, including AJ Bell, Hargreaves Lansdown and Alliance Trust, charge no set-up or administration fees for the wrapper, although once you move away from ordinary collective funds there may be other charges involved.
Alternatively, depending on what kind of scheme is on offer, you may be able to transfer to your current employer's pension if the charges are lower or the choice of funds is better.
But a separate personal pension of some kind could provide more flexibility at retirement, as well as avoiding the risk that all your savings end up in one basket.
The transfer process itself can be a bit wearisome. An IFA will do the work for you, but if you don't want to pay for advice, Adrian Lowcock, senior investment adviser at Bestinvest, recommends the following:
"First, contact the pension provider you want to move to and get an application form. Then get in touch with all your existing providers and ask them to send you the discharge papers for your old schemes.
"Make sure everything is completed – your new provider should be able to help if necessary – and then submit the discharge papers with the application form to the new provider."
Lowcock says the whole process can take four to six weeks, though he warns that it's important to stay on top of it and chase the paperwork up if necessary.
The cash equivalent transfer values (CETV) is an assessment of the total accumulated cash value of a pension you will be able to take out of your existing pension and move into a new one should you change employers or decide you want to move to a more flexible scheme with greater benefits and lower administration costs. The transfer value will depend on the trustees of the pension fund assessing your contributions and investment growth to determine the transfer value, which may have to be certified by the scheme’s actuary.
A collective investment vehicle (known in the US as a “mutual” or “pooled” fund) and similar to an Oeic and investment trust in that it manages financial securities on behalf of small investors who, by investing, pool their resources giving combined benefits of diversification and economies of scale. Investors buy “units” in the fund that have a proportional exposure to all the assets in the fund, and are bought and sold from the fund manager. The price of units is determined by the value of the assets in the fund and will rise or fall in line with the value of those assets. Like Oeics (but unlike investment trusts) unit trusts and are “open ended” funds, meaning that the size of each fund can vary according to supply and demand of the units form investors. Unit trusts have two prices; the higher “offer” price you pay to invest and the “bid” price, which is the lower price you receive when you sell. The difference between the two prices is commonly known as the bid/offer spread.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
Tax-free lump sum
An inelegant phrase that is nonetheless accurate in what it describes: a one-off payment to a beneficiary that is free of any form of taxation. Usually received when using a pension fund to purchase an annuity, as 25% of the overall fund can be taken as a tax-free lump sum.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
A form of money purchase defined contribution pension launched by the then Labour government in April 2001 with low charges and no-frills minimum standards. Designed to appeal to people on low and middle incomes who wanted to save for retirement but for whom existing pension arrangements were either too expensive or unsuitable, the stakeholder didn’t really take off and looks to be superceded by the National Employee Savings Trust (NEST).
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
Like a self-select ISA but for pensions, self-invested personal pension is a registered pension plan that gives you a flexible and tax-efficient method of preparing for your retirement. It gives you all sorts of options on how you put money in, how you invest it and how it’s paid out and offers a greater number of investment opportunities than if the fund was managed by a pension company. SIPPs are very flexible and allow investments such as quoted and unquoted shares, investment funds, cash deposits, commercial property and intangible property (i.e. copyrights, royalties, patents or carbon offsets). Not permitted are loans to members or people or companies connected to the SIPP holder, tangible moveable property (with the exception of tradable gold) and residential property.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.