Should I consolidate my pensions?

Q: How can I consolidate four pensions?

"I am 35 years old, and over the past 11 years I have accumulated four personal pension schemes through four different 
employers. Three of these are 
defined contribution personal 
pension plans and one is a final salary scheme. Apart from ensuring my contact details are correct and reviewing the quarterly statements, I have left each fund alone.

"However, upon joining my most recent employer’s pension scheme a year ago, I decided to maximise my contribution levels. I would like to take more responsibility for my pensions and where I’m invested. Would you recommend that I 
consolidate my three personal 
pensions into my new scheme?"

A: Matt Pitcher, a wealth adviser at Towry Law, says:

As you intend to manage your 
pension funds proactively, dealing with four pension providers could soon become a logistical headache. Your pension funds will be far easier to manage if you consolidate your three existing defined contribution personal pensions into your most recent plan.

When making any transfer, you need to be careful about reduced fund values and exit penalties. Most 
pensions can be transferred without exit penalties or charges, and even those that do have penalties are sometimes better moved.

However, if one of your pensions is invested in a with-profits fund, for example, there’s a danger you will lose your guaranteed annuity rate. You may also be hit with an exit penalty, called a ‘market value 
reduction’ or MVR, that can be as high as 20% of your fund’s value.

Transferring a group pension may also include an exit fee of 1% - 2% of your total balance.
So, if you do choose to consolidate your plans, you should first make sure that you are happy with any penalties the providers might impose.

You should also ensure that your current scheme gives you access to a range of funds and fund management 
companies – while it may be 
appropriate for equities to make up the largest percentage of your 
pension fund, you should not ignore other asset classes such as cash, fixed interest and property.

Q: Should I move my additional voluntary contributions?

"I am 51, and have been made redundant, which means I can draw an 
immediate unreduced pension on my final salary. I also have a freestanding additional voluntary contributions (AVC) pot worth 
approximately £7,000.

I have three options: firstly, move my AVC into the main pension fund, although no spouse pension will be paid on this and there’s no yearly 
increase; secondly, buy an annuity now; or, finally, defer buying an annuity.

I have been advised to defer 
buying an annuity as rates are low and if I leave this purchase for 
another 10 years I would get a better rate, due to my age. So would I be better off moving my AVC into the main pension and having this paid immediately, as the payments would amount to approximately £3,300 over the next nine years?"

A: Francis Klonowki, principal of Klonowski & Co, says:

You could certainly get a better 
annuity rate in 10 years’ time because of your age, but that doesn’t mean 
annuity rates themselves will improve. These rates have been falling in recent years, and there’s no indication that they will increase again in the future.

The fund size could also be a 
problem. It’s probably too small to take advantage of the best open market rates, as most of them require a larger minimum investment. Even with a steady fund growth, you may find this is still the situation in 10 years’ time, as the minimum requirements will almost certainly increase.

So my initial advice would be to take the opportunity of adding it onto your main pension and having the income for life. The pension offered is slightly higher than you could obtain on the open market anyway, so option two would not be appropriate. The main problem with this, however, is that your income will decrease in real terms with inflation.   

You don’t mention whether or 
not you will be working again. If 
you do, and there’s a possibility of building up a further pension fund, then I would suggest you keep your AVC. You could then merge it with your new fund when you’re ready to draw benefits, and the larger fund should provide for more options on the open market.  

Q: Should I transfer my pension and go it alone?

"I have funds in an 
occupational pension scheme from when I worked some years ago for a computer company. As I have no control over its investment portfolio, please could you advise if you think that it would be a good idea to transfer it into some kind of self-directed pension product where I can trade (possibly tax deferred) in shares and mutual funds?

"I would also like to know if I can take an early retirement lump sum 
distribution of up to 25%.
Also, many of the prospective funds I’ve looked at take high 
annual administration fees based on outstanding balances – are there any that just take transaction fees?"

A: Matt Pitcher, a wealth adviser at Towry Law, says:

Occupational pension schemes can be complex, which is why most pension companies won’t accept a transfer from one unless you’ve received 
financial advice. If yours is a final 
salary scheme, then it’s very unlikely it will be wise to transfer.

Even with a company money-purchase scheme there may be a guaranteed minimum pension or protected tax-free cash, which would make a transfer unwise. Seek independent financial advice on the pros and cons of a transfer.

But if you are happy to self-manage a portfolio of shares and collective funds, then you can transfer into a self-invested personal pension (SIPP). There are many SIPPs available that work like low-cost online share-
dealing services. Make sure that you invest in as wide a spread of asset classes and funds as you can.

Be careful about this method of investing, though: most non-
professionals do not have the time, experience or access to information that a professional has.

Q: Pension charges too high?

"I am 48-years-old, self-employed, and have had a personal pension plan 
with Allied Dunbar, which later became Zurich, for nearly 22 years. Recently, I discovered that Zurich is one of the highest charging 
companies in terms of its 
administration fees.

"I’ve never missed a payment but I’m concerned that I’m paying over the odds and may discover that my pension turns out to be a lot smaller than I was anticipating. What are my choices? Should I switch to another company, stay where I am or stop the pension altogether and put the money 
somewhere else?"

A: Francis Klonowki, principal of Klonowski & Co, says:

When you took out this plan, the charges were certainly higher than those available now.  But it was also normal for companies to levy high initial charges, mainly to pay up-front commission to advisers. Those initial charges would be reflected in early surrender or transfer values, which would invariably be lower than the actual fund value. If you keep 
premiums going at the agreed level, those charges are gradually recouped over the term of your plan.

In Allied Dunbar’s case, the charges would be imposed by means of ‘initial’ or ‘capital’ units. Your initial premium, and any subsequent increase, would buy these capital units for a fixed initial period (three or four years). These would be priced much lower than the accumulation units that you would buy from then onwards.

The annual management charges on capital units, for the lifetime of the contract, would be much higher than that of 
accumulation units. The penalty for transferring is simply the capitalised value of the future capital unit charges.

A transfer should only go ahead after proper analysis of the policy to establish if there would be any material disadvantage. Charges are just one of the issues to be considered. If the transfer value simply reflects the future charges that would be deducted anyway, then this is a ‘neutral’ factor. Transferring to a new, perhaps stakeholder, contract with lower costs could be to your advantage – even if fund performance is the same.

The other factors to be considered include death benefits, tax-free cash entitlement (sometimes higher with older plans), investment choice and past performance. In some older policies, the death benefits are less than the transfer value; in more recent plans, the death benefits are usually the full fund value, which is often higher than the transfer value.

Another solution you should consider is to carry on paying the current level of contributions to Allied Dunbar, but not increase them or make any single contributions. If you wish to contribute more, any increase should then be paid into a lower-cost stakeholder or personal pension.