The modern pensions landscape is something of a contradiction. On the one hand, pensions are often linked to employment. On the other hand, people will often have several employers over their working life. This can lead to them having multiple pensions. It, therefore, raises the question of whether or not it’s best to consolidate them. Here is a quick guide to help.
Defined contributions versus defined benefits
If you’re working in the private sector, it’s almost guaranteed that you’ll be in a defined contributions pension scheme. This is a scheme in which the employer only guarantees the level of the contributions. What the employee receives when they reach retirement age depends entirely on the performance of the investments their contributions purchase.
If you’re working in the private sector, however, you may still be in a defined benefits pensions scheme. These are often known as “final salary” schemes as they guarantee ex-employees a percentage of their wage/salary at the time of their retirement (or departure from the organization).
Transferring out of a defined-benefits scheme may be possible but it has huge implications. Transferring out of a defined-contributions scheme, by contrast, is less of an undertaking. It should, however, still only be done after due consideration and preferably after professional advice.
Defined contributions schemes are all individual
Although defined-contributions schemes all work along broadly similar lines, the details can make a big difference. It’s therefore important to read and understand the terms of each of the schemes of which you are a member.
In particular, you want to know the charges, the nature of the investment vehicle, how much of a lump sum you can take and whether you have a guaranteed annuity rate. You also want to know if you have any scope to change these within your current scheme.
Finally, you need to know the process and timescales for and cost of both transferring your pension pot to another provider and transferring another pension pot into the current one. In particular, it’s important to find out if any funds you transfer would be eligible for any special benefits your scheme offers.
Transferring pension funds can involve a lot of work
The obvious benefit of consolidating pension funds is the fact that it can eliminate a lot of paperwork. In particular, it eliminates the need to inform all your various pension schemes every time you change your contact details. It therefore vastly reduces the likelihood that you’ll lose contact with a scheme.
This is, of course, very reassuring and this reassurance can have a high value. Only you can decide whether or not the value is high enough to justify the work involved in consolidating pensions. When you’re making this decision remember to factor in both the cost of your time and any costs charged by your current pension providers.
When you’re considering this, remember that these days just about all pension schemes have online portals where you can manage your pension. These vastly cut down on the need for schemes to send out physical paperwork. They also make it much easier to keep your contact details updated.
Consolidating pensions puts all your eggs in one basket
The pensions industry is highly regulated. This means that, in principle, you should know that your investment funds are safe regardless of which provider you use. In practice, even regulated industries can have serious problems that wind up impacting customers. For example, at present, the energy sector is going through major turmoil.
Additionally, different pension schemes will have different pension-scheme managers. This means that they can have different levels of investment performance. If one scheme consistently outperforms the others then it could well be best to consolidate your funds in it. If, however, each scheme has its own pros and cons, then it might be best to diversify.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.