The last decade or so has seen considerable changes in pension regulations, with more expected in due course. This has resulted in increased freedom of choice upon retirement and the introduction of workplace pensions. It has also prompted many people to combine pensions to simplify management, reduce costs, and enhance investment returns. If you have several pensions, it may be sensible to seek pension consolidation advice and review your situation in more detail.

What is pension consolidation?

As the term suggests, pension consolidation involves combining pensions into one plan. While you will come across different variations, there are two basic types of pension plans:-

Defined benefit (final salary scheme)

This type of workplace pension is linked to your years of service and final salary, with both employees and employers contributing to the fund. Upon retirement, there is a guaranteed income which may include incremental increases in line with inflation or some other financial tracker. Due to the guaranteed element, and cost of running such schemes, many companies now operate defined contribution schemes.

Defined contribution (money purchase scheme)

There are two sub-sectors of the defined contribution pension scheme, a private pension and a workplace pension. The main difference in terms of contributions is that your employer will contribute to the workplace pension but not generally to your personal pension. Upon retirement, there is no guaranteed income which is why this is often referred to as a money purchase pension. While you can elect to manage your own pension investments, and drawdown fund as and when required in retirement, you can also purchase an annuity.

Taking advice

As there is a guaranteed level of income with a defined benefit pension scheme, it is vital to take advice regarding a possible transfer. This is because when you transfer out of a defined benefit pension scheme you will lose the guaranteed income, effectively converting to a defined contribution scheme. Indeed, the law requires you to take independent financial advice before transferring defined benefit pensions with a value above £30,000.

Why should I consolidate my pensions?

It is essential to assess the pros and cons before considering pension consolidation to ensure you make the correct decision. There are many short, medium and long-term issues to discuss with your financial adviser, which include:-

Transferring defined benefit into a defined contribution scheme

As we touched on above, it is sensible to take independent financial advice if you are considering transferring pension assets from a defined benefit to a defined contribution scheme. The regulators believe this is "not the right choice" for the vast majority of individuals, but there are exceptions to the rule. For example, the guaranteed income terms may not be attractive, investment returns may be disappointing, or you believe you can better manage your pension assets.

While it is advisable to seek guidance, you are legally obliged to do so where the transfer value is greater than £30,000.

Administration of pension assets

Many people will be surprised to learn that the average person will change jobs 12 times in their lifetime. The introduction of workplace pensions, not to mention historic pension assets, means that you could have numerous pension funds to manage going forward. But is this really an issue?

A report by the Association of British Insurers (ABI) has cast a surprising light on the management of pension assets in the UK. Key points from the report include:-

• There are approximately £26.6 billion of pension assets not currently matched to their owner
• This involves almost 3 million pension plans
• Since 2018, the value of lost pension pots in the UK has increased by 37% (£7 billion)
• During the last four years, there has been an increase of 75% in the number of lost pension plans

To put this into perspective, only 4% of individuals consider informing their pension provider when they change address. This compares to 89% who instantly tell their GP/dentist of a change in their circumstances.

The administrative benefits of combining your pension assets under one umbrella can be significant. In addition, the introduction of workplace pensions and the growing popularity of personal pensions further highlight the need to better manage pension assets.

Pension management costs

The ongoing pension revolution has created significantly more competition in what was already a very competitive area of the market. Consequently, there may be considerable long-term cost benefits in combining pensions under one plan. While many of us will have pension assets, very few will be aware of the underlying costs associated with managing individual plans and dealing charges. Even if it turns out there is little or no real benefit in combining your pension assets, from a cost perspective, it does no harm to be aware of the charges.

In recent years we have seen growth in the self-management pension sector, including SIPPs and similar arrangements. Many of these plans have very competitive charging structures, which can enhance your future returns. As you may have a pension plan for up to 40 years and beyond, the compound impact of cost savings can be considerable.

Expanded choice of investments

It is essential to look at each pension plan in relation to charges, administration and also the choice of investments. You will often see restricted investment choices where plans are perhaps focused on in-house funds or connected third-party offerings. This may not affect your long-term investment returns, but it is worth investigating further. Whether you look to combine pensions under a more flexible plan, offering a broader range of investment choices is something to discuss with your financial adviser.

Transparency is now an integral part of the pension industry, and all of the relevant information you require will be made available by your pension provider.

Potential downside of combining pensions

In the interest of balance, there are also potential downsides to transferring pension assets, such as:-

• Loss of guaranteed income with a defined pension scheme
• Employer may not contribute to a new arrangement
• Transfer/exit fees

There is no one size fits all solution when it comes to pension consolidation, and it is important to take financial advice.

How Assured Private Wealth can help

Assured Private Wealth has a reputation for providing exceptional wealth management advice with a particular emphasis on pension assets. We are up-to-date with the latest regulations, preparing for future changes and always consider the short, medium and long-term repercussions of any pension transfers.

Personal approach

While many of our competitors take a one size fits all approach to pension management, we provide a more personal service. This ensures a growing trust between clients and advisers as well as a proactive rather than reactive environment in which to operate. In addition, we are available if you have any questions, comments or queries. For example, the latest pension regulation changes may be confusing, or you would like to discuss your options in more detail.

Wider wealth management

When considering taxation, investment and long-term wealth management, it is vital to know each client’s broader situation. We offer a range of wealth management services, giving us a greater understanding of the current situation and potential changes/requirements going forward. Our independent status also means we have access to the full range of investment products, offering the opportunity to enhance returns going forward.

It is essential that any pension advice also takes into account different areas of your personal/financial life. What may appear to be the correct move in isolation may require further consideration when looking at the wider picture.

Regulatory changes

As we discussed above, pension regulations have seen significant changes over the last decade. This takes in everything from workplace pensions to the increased state pension retirement age and more. While the industry and individuals welcome the greater freedom to manage their pension assets, this brings more responsibilities and challenges. We are proactive rather than reactive, considering ongoing changes and future adjustments. The world of pension regulations can be complex!

Summary

There are many issues to consider in relation to pension assets and pension consolidation. If you are looking at combining pensions, you must take into account the short, medium and long-term implications. There are also regulatory/legal issues to address as you look to protect and enhance your pension fund assets. 

Here at Assured Private Wealth, we have expert advisers on hand to explain the changing regulatory environment and discuss the most appropriate adjustments for your scenario. Decisions taken or not taken today could significantly impact your pension asset returns many years down the line. Consequently, you must take professional financial advice at the earliest opportunity.