Is it better to have more than one pension?
Our Wealth Planning team look at the benefits and drawbacks of pension consolidation.
A growing number of people find themselves holding several pension policies. If you hold multiple pensions, you may wonder whether simplifying your pensions into a single policy would improve your position. You may even be surprised to learn that not all pensions are created equal, with differing levels of quality with regards to investment options, retirement options and even death benefits.
Why consolidate your pensions?
1. Simplified administration
Imagine keeping your fruit, vegetables, beverages, and protein in four different refrigerators in four different rooms. When you need to eat, it could be quite the effort to make a simple meal. The situation is not that different from needing to access multiple pensions to fund your retirement; having everything in one place should be far simpler than needing to go to multiple providers with different systems and options. Additionally, upon your death, your family will find it easier to reach out to just one pension provider to sort out the death benefits from the scheme. Lastly, and perhaps most obviously, you may personally find it easier to track and manage a single pension during your lifetime.
Although there may be considerable benefits to holding just one pension, some people will have concerns about holding ‘all of their eggs in one basket’. The main concerns will be around the financial security of the pension provider and the level of protection offered should the provider fail. Many pensions are structured under trust arrangements, meaning the assets held in the pension should be safely ‘ring-fenced’ if the provider fails. Where this is not the case, the Financial Services Compensation Scheme (FSCS) may be able to offer compensation (sometimes at up to 100% of the fund, with no upper cap, where the pension is structured as a ‘contract of long-term insurance’). A qualified adviser can explain the risks associated with using a single pension provider and the protections that may be available.
2. Death benefits
As pension legislation and products have evolved over the years, the death benefits available from pensions have diverged significantly. At present, pensions do not typically form part of your estate on death and, with certain providers, can be passed on to the next generation for their benefit (whilst remaining outside of their estate).
Older pensions often feature the most restrictive benefits, with the most likely death benefit being a simple ‘return of fund’ to your nominated beneficiary. With the ‘return of fund’ benefit, the money in your pension is paid directly to your beneficiary, entering their estate for Inheritance Tax (IHT) purposes (unless the benefit is paid to a trust).
Newer pensions, particularly the Self Invested Personal Pension (SIPP), tend to offer a wider range of death benefits, giving your heirs a range of flexible options in terms of how they access your pension funds and helping them minimise the impact of taxation. It may be the case that moving your older pensions into a new arrangement has a beneficial impact on the death benefits available to your heirs.
As pensions are complex and can include generous benefits and guarantees, it is prudent to take professional advice before engaging in such an exercise. Additionally, the regulation and legislation associated with pensions can and does change regularly; it is entirely possible that the rules governing death benefits and pension taxation could become harsher in the future. Having a qualified and trusted adviser can help you navigate these changes and ensure your pension planning remains current with legislation.
3. Retirement options
For many years, the end game for a pension was the purchase of an annuity. Modern pensions offer Flexi-Access Drawdown (FAD), providing beneficial flexibility as there is no obligation to draw funds from the pension and up to 100% of the fund can be drawn at any time as well. This flexibility can be desirable when you have other income sources or if you have no need for the pension in your lifetime and would prefer to use your pension as a means for benefitting the next generation.
Many older pensions do not offer this flexibility and instead may require you to take all of your pension benefits by age 75 (normally via annuity purchase, but potentially as a one-off lump sum). Where this is not desirable, consolidation into a pension which offers FAD, such as a SIPP, could be beneficial.
4. Investment options and strategy
Workplace pensions, as well as older personal pensions, often suffer from a fairly restricted list of investment options. Rarely do such pensions enable access to ‘listed investments’ (such as direct shares, corporate bonds, government bonds, ETFs or investment trusts) and they are often limited to collective funds offered by the provider itself (though this is certainly not always the case).
SIPPs offer access to a large investment universe and normally support ‘listed investments’. Consolidation within a pension that has a wide investment range can allow you, or your investment manager, to craft a portfolio which better meets your specific investment goals.
It is often desirable to have a consistent investment strategy across your pension portfolio, as the goals associated with your various pensions are typically identical to one another. However, with multiple providers, you may find it difficult to build a consistent investment strategy due to differing investment options. Holding a single pension allows all of your pension assets to be easily invested according to one strategy and with the same goals in mind. Additionally, the use of a SIPP often enables a professional investment manager to offer you investment services, such as Discretionary Portfolio Management or Advisory Investment Services.
Despite the advantages of a SIPP for investors, a scheme with basic investment options can sometimes be very convenient for those who do not take professional advice or for those with basic (or limited) investment knowledge. It may be the case that a basic investment range can meet your specific objectives and potentially at a lower cost than you would find with a SIPP.
However, you should check charges of an existing scheme as you may be paying too much and could save money (and boost your pension) by moving to a more cost-effective pension, such as a SIPP.
5. What are the risks?
Though pension consolidation can help many people meet their specific objectives, there are risks.
Some pensions carry very attractive guarantees or benefits and giving these up may not be in your interests. A qualified adviser can help you understand your specific pension entitlements and whether you might hold guarantees or other useful benefits; they can also help you understand how these benefits might fit into your overall financial plan. Where such benefits exist, it is prudent (and sometimes required under legislation) to take advice prior to consolidation. Financial advice will also help you understand any differences between the charges of different pensions and whether moving your pensions is right for you.
If you have what’s known as ‘safeguarded benefits’ from a scheme, for example, if you have a guaranteed annuity rate and the value of these benefits is more than £30,000, you are required to get regulated financial advice before you can transfer.
Is pension consolidation right for you?
As mentioned earlier, pensions are a complex area of financial advice and should not be viewed as a ‘simple’ retirement solution. If you hold multiple pension policies and feel you could potentially benefit from pension consolidation, you should seek advice from a qualified individual, such as a Barclays Wealth Planner.
If you have a defined benefit pension – also known as final salary – which is a type of company pension that pays out a guaranteed income at retirement, there are separate rules. It’s now a legal requirement to have financial advice before you transfer out from one of these schemes that has a cash transfer value of more than £30,000. Even with advice, some providers may not accept them as a transfer, and we at Barclays won’t accept transfers into our self-invested personal pension (SIPP) from defined benefit schemes.
Speak to your Wealth Manager or contact us if you would like to arrange a meeting with a Wealth Planner to discuss your options.
Your Wealth Planner can help you understand the effect of tax on your wealth and offer tax-efficient wrappers for your investments. They’ll be able to guide you towards making the right decision for your financial planning needs. Your planner can't offer tax advice – you should seek that independently.
This article does not constitute personal financial, tax or legal advice. Each person’s circumstances are different so if you are unsure about investing, you should speak to your Wealth Manager.
Things to consider
Please bear in mind that tax rules can change in future and their effects on you will depend on your individual circumstances.
The value of investments can fall as well as rise. You may get back less than you originally invested.
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