LCP has published a new guide, outlining both the benefits and potential risks involved when consolidating existing pensions.
The paper, aimed at trustees and those running pension schemes, is intended to give members more information on this issue, enabling them to make better decisions around consolidation.
The paper, “Five reasons to consolidate your DC pensions – and five reasons to be careful”, is jointly written by LCP partners Dan Mikulskis and Steve Webb. They say there is a need for more information on this issue, with workers now starting a new pension every time they start a new job, meaning many will reach retirement with multiple pension pots.
The introduction of the pensions dashboard in the next few years should mean that people can readily see in one place all of their different pensions. This is likely to provide further impetus to the growing drive to consolidate pensions into a single pot.
LCP says there are likely to be benefits to consolidating at least some of these pensions into a single, more modern arrangement. It says these benefits include potentially lower charges (particularly from pre-AE schemes), the ability to rationalise your investment strategy and the potential to diversify investments more effectively. Many older schemes for example may be may be invested with a UK bias, or may not take advantage of asset classes, such as infrastructure, which have become more mainstream in recent years.
However the guide also highlights the fact that there may be reasons to be careful before moving pension pots around. These include the issue of losing vauable products features on older pensions, including guaranteed annuity rates, which may be lost on transfer. LCP also warns about giving up ‘small pot privileges’ such as the ability to access pots under £10,000 without triggering the Money Purchase Annual Allowance’ – a tight limit on tax-relieved future pension saving. In addition it says that older pensions may have other attractive ‘protected’ features, such as the ability to access it before the proposed normal minimum pension age of 57 by 2028.
LCP partner Dan Mikulskis says:“From an investment point of view, your mix between growth assets and stable assets is likely to the biggest driver of your investment returns. But it is very hard to get this mix right – if your money is scattered across lots of different pensions, all with their own approach to investing your money.
“Consolidating can also dramatically reduce your costs, with old ‘legacy’ pensions often charging at least twice as much as more modern arrangements. Switching to low cost funds can add tens of thousands of pounds to your final pension pot at retirement”.
Webb adds:“Despite the attractions of pension consolidation, it is important to look before you leap. Pension products may have attractive features which can be lost if you transfer out as an individual. This could include access to more tax free cash, guarantees on the annuity rate you can secure, or even the right to access your pension at a certain age. Before consolidating you should make sure you know what you are giving up and weigh up the pros and cons before doing so”.
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