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
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.
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.
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.
With-profits funds are administered by life assurance companies and access to them is through the life company’s products such as bonds, endowments and pensions. Your monthly contributions are pooled with other investors’ money and invested in a mixture of shares, bonds, property and cash. Each year, a “reversionary” bonus (a declared percentage) is added to your investment and a large part of the policy’s final value depends on these bonuses during the investment period. In years when the with-profits fund performs well, some of the return is held back and paid out in years when the fund does badly and this “smoothing” process makes with-profits investments unique. When the policy matures, the life company may pay a discretionary “terminal bonus”.
Personal pension plan
A money purchase (defined contribution) pension that the holder can make contributions to if the company they work for does not provide an occupational or final salary scheme they can join or they are self-employed. PPP contributions qualify for tax relief.
Not to be confused with an early repayment charge (ERC). Exit fees are levied on top of ERCs, which are a method of clawing back lost interest on a loan repaid early. By contrast, exit fees are charged for the administrative work this entails. They are charged as flat fees, from £150 to £300. However, in January 2007, following mortgage lenders surreptitiously raising fees sometimes by fivefold, the Financial Services Authority (FSA) intervened and most mortgage lenders removed exit fees from new mortgages. If you paid exit fees on your mortgage before January 2007, you may be able to claim them back.
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.
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).
Additional voluntary contributions
If you’re a member of an occupational pension scheme but want to increase your contributions to help boost your income in retirement, this is where AVCs come in. An AVC is a top-up pension that sits alongside your company pension and is administered by your employer. You get tax relief on your contributions and, if you move jobs, you can apply to transfer your AVC plan to your new employer or your AVC your contributions have to stop with your old employer and you will need to start a new AVC plan with your new employer. An AVC linked to a company scheme is subject to the rules of the main pension. (See Free-standing additional voluntary contribution).
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).