Combining your pensions is usually a good idea if you have had multiple jobs over the years.
Before you go ahead and do it though, there are some key bits of information you need to find out. Older pensions can have some valuable benefits which could be lost on transfer.
Why combining your pensions is a good idea
If you have had multiple jobs over the years then combining your pensions is going to make your life easier in a number of ways.
It’s going to make it easier to keep track of where your pensions are if you are only dealing with one pension provider. Easier for you but also easier for your family to find out what pensions you have should you pass away.
Combining your pensions into one pot means it will look like you have more savings for retirement which will give you more focus. This will help make things clearer in knowing what level of retirement income the pot could produce and how much more you need to save if any.
The bigger the one pot the more likely charges for managing the pension will reduce as most pension providers operate a tiered charging structure. Percentage charges usually reduce the more money invested.
It’s far easier to manage the underlying investment strategy for one pension rather than chopping and changing investments inside different pension pots. Some older pensions will likely have limited investment options whereas newer pensions will allow lots more different types of investments.
One of the most important benefits of combining your pensions will be to benefit from flexible retirement options. Being able to withdraw your pension income in lots of different ways to suit your circumstances at the time.
What you need to check before combining your pensions
So we know it’s generally a good idea to combine your pensions but before you transfer one pension pot into another be really sure that you understand what you are giving up before you proceed.
Here are six things to check with your existing pension provider.
#1 – The type of pension you are transferring
Is your pension a defined contribution (money purchase) or defined benefit (final salary)?
There are less risks involved when transferring a defined contribution pension but if you are planning to transfer a defined benefit pension then that is a whole different thing.
There are rules in place that state if your defined benefit pension guarantees are worth more than £30,000 then you must take regulated financial advice.
You will be giving up a secure income in exchange for a pension pot that you have to manage with no guarantee of income.
#2 – Transfer penalty
Some pension providers will reduce the value of your pension on transfer. This is effectively a penalty.
The penalty can be easy to miss as it will not be reflected in the ‘current value’. You need to ensure you ask for the ‘transfer value’ as well as this should include any penalties.
Some providers might even charge an administration fee for arranging the transfer.
If your pension does include a reduction on transfer then you should find out when the penalty runs out and weigh up whether it’s worth keeping the pension where it is until then.
#3 – Guaranteed minimum income or guaranteed annuity rate
Some older style defined contribution pensions have a guaranteed level of income attached that the provider must pay out on a specific retirement date.
The levels of income guaranteed are usually higher than what you could get if you looked for a guaranteed annuity on the open market.
Again you will need to weigh up whether a guaranteed income is what you want and whether the level of benefit is worth keeping the pension where it is and waiting for.
#4 – Guaranteed minimum pension value or guaranteed return rate
If your pension is invested in a ‘with profits’ fund then there can sometimes be the benefit of a guaranteed minimum pension value. This means even though the pension is invested and goes up and down, the provider must secure a minimum value at retirement even if markets have fallen at that point.
Also, some with profit funds have guaranteed bonus rates that they pay every year even if investment markets are down.
Are the bonus rates better than the average return you would have got from investing in non with profits funds at the level of risk you are comfortable with?
#5 – Extra tax free cash lump sum
Nowadays, most modern pensions will allow you to take up to 25% of your pension value as a tax free lump sum.
Some older pensions will have a protected tax free cash amount that can be a higher amount than 25%.
#6 – Life insurance
If you still have a mortgage or a young family to look after you might like the benefit of additional life insurance.
Some pensions will pay out an additional amount on top of the pension value in the event of your death.
It’s a good idea to check this figure and work out if you already have enough life cover.
If you are considering retiring and are not sure on what to do with your pensions then please get in touch for a free no obligation 15-minute call. We would be happy to review your position, explain where you stand and what you need to do to get the retirement you desire. We’ve created hundreds of happy retirements, this could be you too!
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
