This communication is for informational purposes only and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, it is subject to change and we are not responsible for any errors or omissions.
Did you know that Western workers now have 3-7 careers over their lifetimes, perhaps with 12 or more? Along the way, employees often build up a workplace pension with each employer. This can lead to quite a complicated picture in later life when you start organising your retirement! Dealing with 12 pension pots (maybe more) can be overwhelming and inefficient.
This is where pension consolidation can help. Here, an individual combines most (or all) of their pensions into a single “pot”. This can be especially useful for expats as they deal with the inevitable complexities of managing finances whilst living overseas. Below, we offer four reasons to consider pension consolidation with a financial adviser.
We hope these insights are useful. If you want to discuss your financial plan with a member of our team, please get in touch to arrange a no-obligation financial consultation, at our expense:
+34 966 460 407
info@scottsdale.eu
#1 Reviews become easier
How are your pensions performing? Are you progressing nicely towards your long-term “target number” for retirement? Naturally, keeping track of one pension pot is far easier than managing many of them.
There is less paperwork and hassle involved, and you save time by only needing to interact with one provider. If you need to make changes (e.g. to your investment strategy), then you do not need to contact multiple scheme admins and coordinate between them.
#2 Costs can come down
Some pension providers (especially older ones) can involve uncompetitive costs – e.g. 2% of the fund value per year or more. This may not sound significant, but higher fees can significantly erode your investment growth.
For instance, suppose you contribute £200 per month to a retirement savings account, and it achieves an average 6% return per year. By year 30, the fund could be worth over £200,000. However, if a pension provider takes 2% per year in fees, the 6% return is effectively lowered to 4%. By year 30, this reduces the value of the pot to £138,000.
By consolidating your pensions into a more modern and competitive scheme, you could lower costs and keep more hard-earned returns.
#3 Opportunities for better performance
There is no guarantee that pension consolidation will improve your returns. Remember, the value of your investments may rise or fall, and past performance is no guarantee of future results. However, consolidating your pensions could expand your choice of funds.
Older schemes may only offer a limited range of investment funds, which may restrict your growth potential. Perhaps they focus excessively on one geographic area (e.g. the UK), limiting opportunities for global diversification in other key sectors, such as technology in the US or Japan. Maybe the scheme only offers funds from one fund provider.
Combining your pensions can give you more choice and flexibility when building an investment strategy. Perhaps you can access other funds with better fundamentals. Maybe you can gain more exposure to interesting markets and styles of investing, such as ESG.
#4 More options for retirement
Before the Pension Freedoms were introduced in 2015, people with a UK-based pension needed to use it to buy an annuity. Since then, most British people have more options. Now, there is the choice to use flexi-access drawdown – i.e. taking money from your pension(s) as and when you need it, whilst keeping the rest of the funds invested.
Despite this, many older pension schemes have not adapted very well to the Pension Freedoms. When members start looking at accessing their benefits after age 55 (the current Normal Minimum Pension Age), they can be frustrated to find their options more limited than expected. However, by consolidating pensions into a newer and more flexible scheme, individuals might enjoy more of the benefits bestowed by the 2015 Pension Freedoms.
Things to consider
Pension consolidation is not right for everybody. There are also cases where it makes sense for someone to combine some of their pensions but not all. For instance, someone with a final salary (or “defined benefit”) scheme will likely want to keep it, as the “gold-plated” benefits are difficult – if not impossible – to replicate elsewhere.
Certain schemes may impose penalties for exiting or transferring away from them. Different providers can vary their costs and terms. You should check these carefully before making a decision, as they can greatly offset the benefits of consolidation.
Some of your older pensions may also have “safeguarded benefits” that could be lost during consolidation. These can be valuable, such as guaranteed annuity rates and minimum pensions. Again, make sure you check for any benefits – preferably with the help of a financial adviser. A professional will know what to look for in the fine print, ensuring you have all necessary information before deciding about consolidation.
Invitation
If you are interested in discussing your own financial plan or inheritance tax strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
+34 966 460 407
info@scottsdale.eu