Why consolidate your pensions?
It can be all too easy to leave your pension savings in high-cost, poorly performing pension funds from previous employers. Here are a few aspects you should be aware of:
Many people who have accumulated a number of different pension plans tend to lose track of how or where their pension contributions are invested, or even how they are performing – which can substantially reduce the size of your retirement income. For example, some older pension plans suffer from very high charges compared with your other plans.
Traditionally, personal pensions favoured with-profits funds – low-risk investment funds that pool the policyholders’ premiums. But many with-profits funds are heavily invested in bonds and, unfortunately, this can reduce expected returns for investors. It is vital that you review your existing pension funds regularly to assess whether they are still meeting your needs. If you are not satisfied with the performance of your with-profits funds you should consider closing it and investing your funds elsewhere. However, you should check if there are any exit costs involved in closing your with-profits funds before deciding to switch the funds into another product.
Many older plans from pension providers that have been absorbed into other companies have pension funds which are no longer open to new investment (so-called ‘closed funds’). As a result, fund performance may not be a priority for the fund managers. These old style pensions often impose higher charges than newer plans and this could also eat into your nest egg. So it may be advisable to transfer any investments in closed funds to another pension plan, possibly consolidating it into one of your other pension plans.
It is worth taking a close look at any investments you may have in managed funds. Most unit-linked pensions are invested in a single managed fund offered by the pension provider. Managed funds tend to be broad-based, lower-risk equity funds that may not provide the level of investment return that you want. You should examine the structure of any managed fund and assess how well it meets your needs.
The lack of alternative or more innovative investment funds, especially within with-profits pensions – and often also a lack of the latest investment techniques – mean that your pension fund, and your resulting retirement income, could be disadvantaged.
Lifestyling is a concept that adjusts how your pension fund is invested according to the length of time to your retirement. ‘Lifestyled’ pensions aim to take higher risk in the early years, probably through substantial equity exposure, with the fund reducing its risks as you move closer to retirement. Ideally, you achieve strong growth in the earlier years and protect the value of your fund from large losses close to your retirement. Not all pension plans, especially older plans, offer lifestyling – so fund volatility will continue right up to the point you retire. This can be a risky strategy and inappropriate for those approaching retirement.
Conversely, more people are now opting for pension income drawdown rather than taking out an annuity. If you choose income drawdown over an annuity, your pension funds remain invested during your retirement. As such, a lifestyled investment policy may be inappropriate.
The onus is on you
The legal and contractual relationship of most pensions involves the pension provider and either you or a trustee/employer. Once you have started your pension, the provider is under no contractual obligation to ensure you are in the right plan or following the best investment strategy. The onus is on you to consider and instigate any changes to your pension plans.