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.
Consider consolidating your pension pots
If your pension is with a number of providers, 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.
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.
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.
When might you think about switching?
When you start a new job
When you leave one job to move to another one, you are treated as having left the workplace pension scheme, but do not lose the benefits you have accrued.
At this stage, you may decide that you want to transfer your pot to the scheme offered by your new workplace.
But if you are thinking about switching, it is important to do this for financial reasons – and not emotional – reasons. It’s crucial that you don’t transfer out of a first-rate scheme simply because you want to cut all links with an old employer. Make sure you research carefully before making the move.
You're looking for better performance
Some people opt to switch their pension because they are in an underperforming scheme delivering poor – or non-existent – returns.
If your scheme is performing poorly, you may well want to move your money elsewhere.
But once again, you need to tread carefully, and ask yourself whether you are prepared to invest your pension pot in more risky funds to get a better return.
If you are approaching retirement age, you need to think particularly carefully before making such a decision.
You want lower charges
Others want to transfer their pension because their scheme comes with punitive charges which eat into their returns, leaving them with less money in retirement.
You want a wider range of funds
At the same time, switching your pension may sound like a good option if you want to access a wider range of funds than those offered by your current scheme.
You're looking for better death benefits
If you feel the death benefits on offer with your current scheme do not match up those offered by more modern schemes, you may want to transfer your pension to a different scheme.
You might, for example, want to move your money into a scheme that allows one of your relatives to inherit your pension when you die, rather than simply spouses or dependents. The same might apply if you are not married to your long-term partner, but want them to inherit your pension once you’re gone.
You want to consolidate several pensions
As people change jobs more frequently during their working life, they often accumulate a number of small pensions along the way.
It can be hard keeping tracking of schemes, and difficult to really know how much your total retirement is worth.
For this reason, many savers want to clean up their finances by consolidating their pensions into one pot.
The good news is, there are plans afoot to introduce a “pot-follows-member” scheme next year which would automatically transfer pensions as workers move jobs into the new employer’s pension scheme.
A final point
As a word of warning, you need to be extremely careful before transferring out of certain schemes – including public sector schemes, such as the nurses or teachers’ scheme – as these offer extremely generous benefits which can be hard to replicate elsewhere.
Equally, if you are thinking about transferring your personal pension to another provider, you must check that the benefits are not outweighed by any exit penalties and entry charges.
No matter what your reason or motivation is for wanting to switch your pension, the key is to do all the research you can to ensure you’re making the right decision.
And if you’re in any doubt at all, make sure you seek out expert independent advice.
For more on switching pensions, visit The Pension Advisory Service
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