Bringing together or consolidating the various pension plans that you have built up over your working life into one arrangement will always make sense. Won’t it?
Amalgamating two, three or more pension funds into one might have its merits such as taking advantage of changes in legislation, one tailored investment approach which is aligned with your risk profile, administration simplicity etc. However, there are a number of checks and balances to consider before effecting a transfer to ensure that you do not inadvertently put yourself at a financial disadvantage.
Below (whilst not an exhaustive list) are some areas that merit consideration.
Guaranteed Annuity Rates
Approximately one in ten pension polices sold in the 1980s to 1990s contained some form of guaranteed annuity rate (GAR). A GAR is the percentage applied to your pension fund value to generate an income for your lifetime. GARs can often be between 8-10% and when compared with today’s annuity rates, typically 4.5% to 5%, offer a significantly higher secure income.
Guaranteed Minimum Pension (GMP)
GMP is a redirection of National Insurance (NI) contributions into a pension arrangement. Typically, GMP would form part of a pension entitlement under a defined benefit scheme but equally can be found in individual buy out arrangements. This benefit will often contain a spouse’s pension and can include escalation; these are retirement options, which frequently appear on client’s wish lists and can be expensive benefits to purchase on the wider open market.
Whilst with-profits funds (a way of investing where returns are smoothed over time) tend to be a little old fashioned there are still many policies in existence, which continue to follow this investment approach. Looking carefully at the wording of these plans can often reveal guarantees, which are not always immediately obvious. One major insurance provider offers a minimum investment return of 4% pa (after charges), regardless of how investment markets perform. I have recently come across a contract where a 27% uplift would be guaranteed, over a 5-year period, if the with-profits investment were held to the nominated pension date.
Protected tax-free cash
A number of pension plans (usually originally funded by an employer but also some older, personal arrangement) will contain a tax-free cash entitlement in excess of the normal 25%. Often the higher entitlement is lost on transfer and will revert to the standard amount (25%). In certain instances, steps can be taken to preserve the higher tax-free cash entitlement depending upon your circumstances.
There are a number of other considerations, such as
- The financial strength of the pension provider you are moving to
- A comparison of charges between both your existing and new provider
- The range of funds available to invest through
- Poor health, be mindful that your pension fund could be moving from an assets outside of your Estate to an investment that might be subject to inheritance tax
Wingate Financial Planning assists clients on a regular basis with pension consolidation exercises. We undertake the necessary research and analysis to ensure our clients are informed when effecting any changes. We are looking for our clients to have a financial plan of which pension planning may form a large piece in the overall planning jigsaw. If you would like assistance with your financial planning, please get in touch.