Introduction -consolidating pensions

How do I or should I consolidate my pensions? This article investigates the topic of Pension consolidation, an area which is very simple in principle. But which in practice features several underlying complexities and concerns. These often discourage people from seriously considering whether pension consolidation will be beneficial for them.

Here then we’ll look objectively at the pros and cons of pension consolidation, and investigate some of the more in-depth considerations. Precisely because of these considerations, consolidating your separate pension schemes into a single unifying arrangement often justifies seeking financial advice. Therefore, we will look at the pros and cons associated with that too.

Before we start however, let’s quickly cover the main types of pension – and a little general background to consolidating pensions:

Types of Pension scheme & ‘Consolidation basics’

There are several different types of pensions, and these types are not all mutually exclusive. It’s a frequent source of confusion, right from the outset. Here are some of the more common types:

• The State Pension.
• Defined Benefit (DB) (a.k.a. Final Salary) schemes – these pay a guaranteed amount of income for the life of the member, from a set retirement age. The level of benefits is usually based on the duration of the member’s scheme membership, and their salary.
• Defined Contribution (DC) (a.k.a Money Purchase) schemes – these aim to build up a pot of money for the member, which can then be used to provide an income in retirement.
• Occupational schemes – pension arrangements which are set up by an employer for the benefit of their employees. These can be either DB or DC in nature, although active DB schemes are now rather rare.
• Personal pensions – arrangements which are set up by, and for the benefit of an individual. They are always DC in nature.

If you have enjoyed a varied career then you might have several of the types of scheme mentioned above, and you might consider consolidating them into one single scheme. This is often possible, but the approaches vary.

When consolidating DC schemes, you will instruct the ‘receiving’ scheme (or adviser) to liaise with your existing schemes on your behalf. The receiving scheme will ask the existing schemes to liquidate your assets and transfer the resulting money to the receiving scheme. Upon arrival the receiving scheme will then invest those funds within your new consolidated plan for you. You should not transfer funds between schemes yourself, via withdrawal and reinvestment.

Consolidating DB schemes is much more involved. Many DB schemes will offer a ‘Transfer Value’ to be moved into a DC scheme instead. These can be substantial, and eye-catching sums of money. This course of action however will remove the valuable benefit of a guaranteed income, and exposes you to several other risks too. Professional financial advice should be sought, and indeed is mandatory in many cases. The Financial Conduct Authority requires financial advisers to begin with an assumption that a DB transfer is NOT in a client’s best interest – and therefore that this course of action would only be suitable if it can be clearly demonstrated to be in that client’s best interest. This is not frequently the case – and extreme caution should be exercised by both client and adviser.

Because of this, the rest of this article concentrates only on consolidation of DC pensions.

Why consolidate pensions?

There are several straightforward advantages to be had from pension consolidation, which will need no explanation to those that have given it some thought: You’ll have a single view of all of your Retirement savings, with no more risk of losing track of individual schemes and their overall value. This’ll make it easier to plan for your retirement.

In fact though there are several more compelling reasons, which come from easier access to better quality advice along with pension consolidation:

Investment Selection

The investment choices made for the funds within your pensions are often overlooked. This is a topic in its own right, and there’s a separate article available. Investment returns can never be guaranteed, and investment decisions must be made carefully. But in principle it is easy to illustrate the significance of investment returns on your pension savings. Consider for example that you contributed £500 per month into your pension for 30 years – £180,000 in total:

• Assuming consistent 2% annual growth, these funds would be worth £246,000 after those 30 years.
• If that growth was 5% instead of 2%, they’d be worth £416,000.
• At 8% growth they’d be worth £745,000 – 3 times the 2% outcome.

These figures are examples only and they are not guaranteed – they are not minimum and maximum amounts. What you get back depends on how your
investment grows and the tax treatment of the investment. You could get back more or less than this.

In fact though there are several more compelling reasons, which come from easier access to better quality advice along with pension consolidation:

Retirement Forecasting

DC schemes have many advantages and flexibilities, but they also present you with several risks. They bring several variables and assumptions into play, which you’ll need to consider in planning for your retirement. A good financial adviser will be able to help you navigate through these, on an ongoing basis as you move towards (and into) retirement. They’ll do this by considering:

• What your ideal retirement ‘looks like’ for you and your family.
• What savings and pensions you have today.
• How much you’re continuing to save.
• When you’d like to retire.
• How much retirement income you would like.
• What other assumptions you’d be comfortable with – for instance
  investment growth.

Equipped with this information, they’ll be able to give you an indication of how likely it is that your retirement funds will last you a lifetime, and not run out too soon.

Tax Planning

There’s several aspects to be considered here, depending on your circumstances, but the most common ones are:

• Personal Allowance tapering – if your income is at a certain level, then the erosion of your Personal Allowance results in an effective marginal tax rate of 60%. This can be mitigated by making pension contributions, and is hence an extremely efficient strategy.
• Lifetime Allowance – a limit on the amount of benefits which can be drawn from a pension without incurring a substantial tax charge. This may influence how much you choose to contribute to your pension – or when you should decide to stop contributing.
• Tax-free cash availability from pensions at retirement – and the options around how (or even if) to take advantage of this.
• Pensions and Estate Planning – pensions are outside of your estate for Inheritance Tax (IHT) purposes. So using the right assets to fund your retirement, and in the right order, is an important consideration. It could help reduce a 40% IHT liability on some of your estate.

Tax regulations change frequently too, so, it’s important to remain up to date in this area.

In-Retirement Planning

Even once you get to retirement, there’s still some areas to watch carefully. Were all of your previous planning assumptions reasonable, and have you met your savings target? Or do you need to course-correct? Do you want to plan for more income in early retirement and less later, perhaps as you become less active? Or would you prefer it the other way around, in case for instance there were care costs to cover? How is the real-world performance of your investments in retirement comparing to the plans you’ve made? And with all of those considerations, does your pension still last as long as you’d wish?

Why NOT consolidate pensions?

It isn’t the right course of action for everyone, of course. Here’s some of the reasons why:

• Higher costs – if you elect to engage a financial adviser to assist with your pension consolidation, and perhaps broader financial planning, then this will not be free. Different advisers charge in different ways for their services, and at different rates too. Make sure your adviser has explained this clearly to you well before you start incurring any costs! Ideally you should feel that the benefit of the advice outweighs the cost – and there is evidence to suggest that it can:
  Recent research by Money Marketing (Source [1] Daniela Esnerova, 24/09/2020) compared the advised clients of the UK’s largest Wealth Management firm with those of the largest non- advised platform. And they concluded that, over the past decade, an advised pension client received 2% higher annual returns (even after all costs) than the equivalent non-advised investor. For a pot of £100,000 invested 10 years ago, the average advised clients had grown to £210,000 after all charges. The non-advised investor ended up with £171,000 on average, 23% less, on a same-sized pot for the same period.
• Hassle – you should be prepared to put some work into the consolidating pensions process. But a good adviser should earn their fees by making this much, much easier for you. Usually you’ll only need to gather some basic scheme and personal details, attend a few meetings (which your adviser will prepare and run), review some reports, and sign consent documents when you’re happy to proceed. If you’ve lost track of some older schemes, then your adviser will be able to help you track them down.
• Concentration risk – Many people are concerned about moving ‘all of their eggs into one basket’ with a single pension scheme provider. Make sure you discuss this concern with your adviser up- front. Regulated firms ensure you are covered by independent statutory guarantees. They separate the firm’s business from your own pension assets, so that the latter remain unaffected should the firm get into difficulties. Read the article ‘How are my Pension Funds Invested?’ and make sure that your funds are invested into a well-diversified portfolio to help minimise concentration risk.

Why act now?

It’s easy to put off investigating consolidating pensions until another day – it’s easily seen as an ‘important but not urgent’ task. But there are some good reasons for seizing the moment:

• You’ve already invested your time in reading this far today!
• The task is only going to get more complex in the future, as you move between further jobs and build up further schemes.
• Meanwhile you might be missing out on opportunities for better investment growth, or more-effective tax opportunities.
• If the unexpected happens, you probably wouldn’t want to leave it to someone else to clear this up after you.

What to do next?

If you’d like to learn more about consolidating pensions, then you can contact Paul Mayhew, of Paul Mayhew Wealth Management, Associate Partner Practice of St. James’s Place Wealth Management. He’ll be pleased to help, with a no-obligation consultation, Paul’s contact details are (please mention Contractor Advice UK when you make contact):

e-mail: [email protected]

tel: 07920 888284

There are also a couple of associated articles in this series which you might find interesting:

• Introduction to pensions for Limited Company owners
• How are my pension funds invested?

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select, and the value may therefore fall as well as rise. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

St. James’s Place guarantees the suitability of the advice given by members of the St. James’s Place Partnership when recommending any of the wealth management products and services available from companies in the Group, more details of which are set out on the Group’s website at www.sjp.co.uk/products.

Paul Mayhew Wealth Management is an Appointed Representative of and represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group’s wealth management products and services, more details of which are set out on the Group’s website www.sjp.co.uk/products.

The ‘St. James’s Place Partnership’ and the titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place representatives.

Reference [1] – Value of advice put at 2% as SJP returns top Hargreaves, Daniela Esnerova, Money Marketing, 24/09/2020.

https://www.moneymarketing.co.uk/news/value-of-advice-average-sjp- advised-pension-client-gross-returns-beat-hl-sipp-investor-by-23-over-last-decade/