Should I Consolidate My Pensions? The Pitfalls of Having Disparate Arrangements

Forget the name ‘pension’ – this just determines the tax treatment – we’re talking about funds that are invested for your future. But how? Are the funds invested across a diverse range of assets? How much risk are you taking on? Will the funds provide you with enough when the time comes to retire?

In life I’ve found there are broadly two types of people - those who appreciate the need for structure and organisation and a general order to their affairs, and others who prefer a more spontaneous, flexible approach to life.

That’s not to say that either approach is right or wrong, and each have their benefits. After all, the most important thing is that we each live our own lives in a way that suits us. Despite their separate traits and life outlook, however, both personality types will probably think to themselves at some point, “I really should sort out my pension”.

Pension consolidation: How to find your pension funds

If you’ve been a working professional for a number of years, it’s likely you’ve accumulated an array of disparate pensions from various employers and business ventures. It is also likely that you’ve been concentrating on the stuff that matters in the moment; the job or project in front of you. In short, you’ve spent your time focusing on your business and career.

If you’re the type of person that likes to be organised, I suspect you have a folder or spreadsheet containing all the details of your pension plans, together with the last statement you received before you moved from one job to the next. Conversely, if you’re a little less fastidious with your record keeping, then chances are that you have a vague idea you had some pension at some point, and there might be a statement in the loft but you’re not really sure.

This lack of certainty over what benefits you have is the first disadvantage of holding disparate arrangements. Have you identified all the benefits you’re entitled to? Unfortunately, there is no national database where you can enter your National Insurance number and, hey presto, up pops a list of all your pension funds. That said, the pension industry has made strides in recent times to help put savers back in touch with their funds.

As a first step, the pension tracing service can help put you in touch with the current administrators of a previous employers’ pension scheme. This is not a perfect service, and you may find yourself doing your best Miss Marple impression as you track down your funds, but it’s worth it to ensure you receive all the benefits you are entitled to. I appreciate some personality types might relish this task more than others.

What to do with your pension funds

Whichever camp you fall in to, it is likely that your older pensions aren’t working as hard for you as they might. You don’t have control of the benefits – you might not even know what the benefits are – and you certainly can’t recall how the funds are invested.

One disadvantage that savers with multiple pensions suffer is a lack of understanding how those benefits are made up, and how the pension benefits may ultimately be accessed. That is, indeed, if the benefits should be accessed at all.

Old style salary related schemes (also known as Final-salary or Defined benefits’ schemes) can provide a guaranteed level of income in retirement. These plans are great because they provide predictable income, which is guaranteed by the sponsoring employer and ultimately the Government-backed Pension Protection fund. They’re not so good at providing flexibility. For example, the point at which benefits are accessed is largely pre-determined by the scheme trustees, at which point savers must make a decision as to how much lump sum they want. That is, if they have the option at all – savers may be forced to take a lump sum they don’t want, or not be entitled to one when really a lump sum would be handy.

Despite this inflexibility, salary-related schemes are still considered as premium, gilt-edged retirement plans. The important thing is to understand what benefits are held, and to ensure this is built into a coherent retirement plan.

Turning your pensions into a retirement plan

Which brings us to the next drawback when holding an array of incongruent pension plans, how to make them fit to a plan. For many, retirement is no longer a case of working flat out until age 65 and then stopping completely, content to see out their days at the social club with an annual cruise taken if funds allow.

Whilst your parents may have been structured, well-ordered people and you have now inherited some of their traits, it does not mean that you must retire in the same manner as previous generations. Modern life demands that plans are different now – or at least considered differently, so you get what’s right for you. You demand something different, and this can only be achieved if you have control over your affairs.

For expert advice on financial matters why not book a call with a Financial Adviser from Integrity365. Email Integrity365 directly for more information.

Defined Contribution Pension Schemes

Having talked of the importance of a retirement plan and understanding how your salary-related pensions fit within that plan, we should turn our attention to ‘defined contribution’ pension schemes.

These pensions provide a ‘pot’ or fund that you control. Unfortunately, salary-related pensions are so generous as to be unsustainable for most employers, and so defined contribution plans are by far the most prevalent schemes available to savers now.

It is likely that if you have accumulated several pension plans during your working life, that the majority of them will be of the defined contribution type. This means that you potentially have a large fund available to provide for your retirement.

This is perhaps the biggest danger to holding an array of disparate pension schemes. You will hold different pension funds, all invested in different areas. Forget the name ‘pension’ – this just determines the tax treatment – when we’re talking about defined contribution plans, we’re talking about funds that are invested for your future. But how? Are the funds invested across a diverse range of assets? How much risk are you taking on? Will the funds provide you with enough when the time comes to retire?

The Tax Incentivised Savings Association (Tisa) trade body has recently advised that around 95% of savers in defined contribution funds remain invested in the default fund. That is, the standard, one-size fits all investment that your (ex)employer placed your funds in when the pension was set up. Is this investment still right for you? Is it any good? By holding an array of pensions, the chances are the answer to these questions is ‘no’ with at least some of your pension funds, if not all.

What this means is that you could be losing out financially through poor investment choice. Worse than that, by holding funds in a range of differing plans, you have no way of implementing a coherent investment strategy across all your funds. You can’t fix the problem. Even if you knew how you wanted your funds invested, can this be achieved through all your different pensions?

What happens to my pension if I die early?

We should also consider what happens in a worst-case scenario. What happens to your funds if you die early? Recent changes in legislation mean that, when structured correctly, pension funds can pass on to spouses and then through the generations outside of your estate (and so free from inheritance tax) and with potentially no tax consequence at all. Conversely, if structured incorrectly – as is the case with many historic pension schemes – the pension funds could fall into the estate, and so potentially attract tax at 40% and could even be paid to the wrong person. If life has moved on since you took a pension out with your first employer all those years ago but your pension nominations haven’t, your ex-spouse, for example, could find themselves the lucky recipient of your hard-earned savings.

All of which means that holding a disparate range of pension funds is seldom a good idea in the long run. There are exceptions to this rule, however. Some old pension funds contain valuable guarantees, for example, that are worth maintaining, so it’s not quite as simple as consolidating everything without expert insight. Whatever age you are, and no matter how many old pension funds you hold, now is time to review your affairs and give serious consideration to pension consolidation. The longer you leave it, the longer you may be missing out.

Those of you who are inclined to keep records of your affairs are in a good position to start, and I’m sure will see the benefit in consulting an expert in this area. And those of you with a more spontaneous approach to life – see today as an opportunity to act. You probably weren’t thinking about pensions this morning, but maybe now you are.

Written by Marcus Rayer Chartered ALIBF, Integrity365

Customer service is at the heart of everything Integrity365 do, from the early days of pensions and ISAs to investments and lump sum decisions, through to retirement and later life planning, they are here to support you through the key stages of your life with a holistic approach to financial planning.