If you’re employed, your employer must provide a pension that both they and you pay into, unless you opt-out. This has been in place since 2012 and most employers had to comply by 2017.
As a result, most of us will have more than one pension, usually as a result of having more than one job in our working lifetime. According to the UK College of Business and Computing (UKCBC), the average person has 6 jobs during their working life: https://www.ukcbc.ac.uk/average-worker-uk-statistics/
At Magenta we frequently get asked whether it is worth combining pensions into one, and we will always consider this as part of our advice process when we take on new clients.
Often people want to make their finances simpler and have one pot and one pension provider, rather than getting information from all sorts of pension providers that they usually can’t keep track of.
So, is it a good idea to do this?
Well, as is usually the case with these types of questions; it can be, but sometimes it isn’t!
What type of pension is it?
It is worth providing a short background on two of the most common types of pension, as there are different considerations attached to each.
Years ago, most employees had ‘Final Salary’ or ‘Career Average’ pensions, which are classed as ‘Defined Benefit’ (DB) pensions. Very few Final Salary pensions are still open these days due to the amount of funding they need and employers’ willingness to do so.
Most public-sector pensions are now Career Average (CARE) schemes. These we would not typically refer to as pension ‘pots’, because they don’t have a fund value that goes up and down each day.
Today, almost all non-public-sector employer pensions are known as ‘Defined Contribution’ (DC) pensions. Put simply, you and your employer (or just you if it is a Personal Pension or SIPP) put in a fixed percentage of pay or a fixed monetary amount regularly, or in lump sums, and it hopefully grows depending on how it is invested. These types of pensions we do refer to as pension ‘pots’, as you can see the value of the fund on any given day.
Some people will have a mixture of DB and DC pensions, or one or the other depending on their age.
DB and DC Transfer Simplicity
Transferring DC pensions between each other is generally straightforward, but there are still things to consider as you’ll see in the following sections.
Transferring a DB pension is far less simple. This is because you are effectively giving up a guaranteed income for the rest of your life in exchange for a pot of money to draw on.
Comparing a DC pension to a DC pension is like comparing apples with apples. Comparing a DB pension with a DC pension is like comparing apples with oranges.
Getting regulated financial advice as to whether to transfer your DB pension into a DC pension is therefore essential. This is mandatory if the transfer value of your DB pension is more than £30,000, which for the vast majority of people it will be.
The rest of this blog post assumes we are talking about DC pensions, however if you want to discuss the possibility of combining pensions that includes a DB pension, feel free to contact us to understand what this could involve. We’re not able to provide advice in connection with these but we can point you in the right direction.
Charges
Some DC pensions will charge you more than others just to be in it, known as the product charge or contract charge. We’ve seen these be as high as 1% of the fund value each year, and as a low as 0.1%. This can make a big difference over time, so have a look at the charges you pay to the pension provider to administer the pension.
Fund Options
There can be a big difference in the availability of funds within each pension product, some provide access to 1,000s of funds and some older contracts (also usually higher charging) can provide access to up to 10, which are usually internal funds that cost more and underperform compared with their peer group.
For those that have specific preferences about how their pension is invested, for example those that have ethical or impact preferences, some pension products provide access to a wide range of funds that meet your specific criteria, however a lot won’t.
Guarantees
Some older pensions offer some valuable guarantees, such as Guaranteed Annuity Rates (GARs). We’ve known some clients being offered up to 10% of their fund as a guaranteed income each year, meaning they only need to live for 10 years in retirement to get more back in income than their fund is worth. Some can offer enhanced Tax-Free Cash, meaning you can get more than the standard 25%.
It is worth looking into whether any of your pensions have these valuable guarantees or non-standard benefits before transferring out of them.
Summary
If all things are equal, it makes sense to combine pensions into a more modern product that allows you to invest how you want at a lower charge– and keep track of things a lot easier too.
Most newer pension contracts offer a wider range of investment choices at a lower cost, and most older contracts are high charging with a small range of investment options. In the main, it is better to be in newer pension products, however, a small number of older pension contracts have very valuable guarantees and benefits that it may be worth keeping.
The information contained within this blog is not intended as personalised financial advice, it is designed to provide generic and helpful information, based on our experience of pensions and advising our clients.
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