As the days of having just one or two jobs in a lifetime are long gone, many people now often accumulate a number of small pensions as they move from employer to employer.
In addition, lots of people also have personal and stakeholder pensions run by insurers, as well as self-invested personal pensions.
Having a host of different pensions can make it hard to keep track of your schemes – especially if you move home and forget to tell the providers.
It is also more difficult to have a good understanding of how much your total retirement pot is worth.
Six reasons to switch your pension now.
Consider consolidating your pots
If this is the case, you may want to think about consolidating your smaller pension pots so you have all your retirement savings in one place. This will not only reduce the fees you pay – meaning more money for you once you stop working – but will also make it a lot simpler to keep track of your savings as they will all be neat and tidy and in one place.
In addition, by moving you money, you may have the opportunity to invest in better funds.
Not sure what pensions you have? Read our guide to tracing old pensions.
Newer schemes have lower charges
Generally speaking, modern pension schemes tend to have lower charges than older ones.
This is especially true if you set up your pension before 2001 – before stakeholder pensions were introduced and charges were capped – as you could be paying very high fees. These could eat into your returns, leaving you with less money in retirement.
By transferring your pension to a cheaper provider, you could significantly reduce these costs.
Watch out for the pitfalls
While this may all sound very appealing, it is important to note that transferring out of your current plan comes with some risks too.
First off, there is a risk you could lose valuable benefits – such as additional death benefits or a guaranteed annuity rate (GAR).
With a GAR, the insurer will pay your pension at a particular rate which may be a lot higher than the rates available in the open annuity market when you retire. Under the new pension rules, you no longer have to use your pension to buy an annuity, but it is still an option – so it’s important to understand the pros and cons of transferring where you have a GAR.
Further to this, switching pension fund could also mean you are faced with huge exit penalties; these could potentially cancel out the benefit of transferring to a new provider.
What are the different types of pension.
Ask lots of questions
Before making any decisions, you should contact the provider of the pot you want to transfer and ask about the size of your pension pot, the annual charges, the fees on your investment funds, and whether there are any exit fees. You should also check if there are any perks you would lose by transferring.
Finding yourself in a new policy that is more expensive and less suitable than the one you left is something you want to avoid at all costs.
If you are in doubt, the key is to seek professional advice.
New rules on “pot follows member”
Next year, the Government is planning to introduce a “pot follows member” policy which will mean workers are automatically asked if they want the defined contributions pensions from their previous jobs to be consolidated into their new scheme.
Switching pension fund (not pension provider) as you approach retirement
As you get nearer to your chosen retirement age, it is important to protect the value of your investments against sharp drops in the stock market.
This is where a process called “lifestyling” comes into play. Lifestyling involves investing in more risky assets when you have a long time to go until you stop working, and then switching into less risky ones (such as cash or fixed interest) during the 10-year run-up to your retirement.
Less risky assets are less likely to be affected if the investment markets were to fall sharply, helping you to avoid watching a chunk get wiped off your investment at the point you cash it in.
As a pension saver, it’s important to note that switching to a new pension provider is inadvisable at this stage given the short time-frame and charges involved.
However, you should be able to switch to lower-risk funds within your existing pension investments, often free of charge.
What about the new pension freedoms?
There is speculation that the whole practice of “lifestyling” could be reviewed following the introduction of the new pension reforms.
This is because de-risking your pension savings is normally done in preparation for buying an annuity.
As many people are now shunning annuities and opting for an investment product that allows them to draw down money from their pot gradually over the course of their retirement, it might be more sensible not to de-risk
Once again, if you are unsure what to do, you should seek professional advice.
Read more about the new pension freedoms.