At first glance, you might automatically assume that pension consolidation is unlikely to affect you in the future. But what if we were to tell you that the average UK worker will have 12 different jobs over their employment career? This opens up the possibility of being a member of 12 different workplace pension schemes – you may also have a personal pension plan. Consequently, pension consolidation will be a potential issue for many people, with several factors to take into consideration.
Suitability for consolidation
Before we take a more in-depth look at the benefits of pension consolidation, it is essential to highlight the two main types of pension plans:
- Defined benefit scheme/Final salary pension
- Defined contribution scheme/Money purchase pension
With a defined benefit scheme, both the employer and the employee will pay into a workplace scheme. The pension available in retirement will be related to their final salary and years of service, with the liability to maintain a fully funded pension scheme on the employer. Due to the specific benefits associated with a defined benefit scheme, transfer to another scheme may not be a sensible option.
The pension available in retirement with a defined contribution scheme is related to contributions and investment returns; there is no guaranteed figure. The vast majority of pension schemes today are defined contribution arrangements, so they may be suitable for consolidation.
Pension consolidation
If you are planning to make any changes to the structure of your pension assets, it is worth taking professional advice beforehand. There are several issues to take into consideration such as:
Simplification
If you have several pension schemes, it can become an administrative nightmare with multiple providers making it difficult to track and manage retirement assets. While simplification should not be the primary driver when consolidating your pensions, it is a benefit that may prove helpful!
Cost efficiency
It may be possible to achieve economies of scale regarding pension consolidation. There may be several fees to review, such as administration fees, investment management expenses and transaction costs. Considering that you may be investing in your pension for more than 40 years, the compound impact of excessive/duplicated charges could be significant.
Focused investment strategy
If you accumulate several workplace pension plans during your working life, each may have investment restrictions, often leading to a variation in returns. Consolidating your pension assets into one plan could allow you to align the investment strategy with your retirement goals. It could also enhance diversification and risk management, potentially leading to greater returns.
Enhanced oversight
Receiving statutory year-end notifications regarding your pension assets can be another administrative nightmare. These statements will include the value of your funds and estimated pension on retirement. How much easier would it be if your funds were all in one plan? There was one statement and one estimated pension on retirement? This would give a much more transparent overview of your current situation and estimated income going forwards.
Portability
Pension portability is becoming a significant factor for many people, especially those that change employment positions regularly. It may prove beneficial to consolidate your pension plans as you move employers, or you may have a personal/private pension scheme. This will give you greater control over your pension assets and ensure no funds are “left behind”. Even though there are ways and means of locating missing pension funds, it can be more complex than you might expect.
Simplified beneficiary designations
The subject of financial beneficiaries is not necessarily a topic many of us would prefer to discuss over the breakfast table. Money is often a taboo subject, but it needs to be addressed, especially regarding inheritance. Many people fail to realise that pension funds typically fall outside your estate on death – therefore, they are not influenced by your will. So, suppose you forgot to update your beneficiaries and, for example, you were to remarry. In that case, there is every chance your previous partner would inherit an element of your pension assets.
The more pension funds you have spread across your working life, the more chance of failing to update beneficiaries. While it may be possible for the “correct” beneficiaries to challenge historic paperwork, this can be difficult and expensive.
Estate planning
In a similar fashion to the simplification of beneficiaries when consolidating pension schemes, it can also be helpful with estate planning. Even though a typical pension fund will fall outside of your estate on death, it is still an asset which needs to be distributed along the lines of your wishes. The more pension schemes involved, the more chance of paperwork going missing leading to a partial distribution of your assets.
Statutory advice
As we discussed above, it may not be appropriate to consolidate defined benefit pension assets into a defined contribution pension fund. As soon as you switch your assets from a defined benefit to a defined contribution scheme, the guaranteed income aspect is removed. This leaves you at the beck and call of investment returns and can lead to a detrimental financial outcome.
To protect individuals from scams and inappropriate advice, defined benefit pension scheme trustees require written confirmation that the appropriate advice has been received. In some cases, a pension trustee might block the transfer of assets if their due diligence suggests that the advice given was incorrect or the risk factors have not been considered in full.
Conclusion
As you can see above, there are both practical and financial benefits to consolidating your pension assets. Cutting down on paperwork will make administration much easier and reduce the chances of pension fund assets going “missing”. It also gives you greater control when it comes to investment, valuing assets and simplifying projected retirement income figures.
Thankfully, there are various layers of protection to ensure that those transferring from a defined benefit scheme are well aware of the loss of guaranteed benefits. In years gone by, we have seen inappropriate transfers, which prompted the regulator to demand the presence of formal advice before completing any transfer. This does not mean that you can’t transfer defined benefit pension assets to a defined contribution scheme, but at various points, you will be prompted to consider if this is the correct move for you.
