Pension Consolidation - Can I? Should I? & How do I?
An increasing number of us now own more than one pension – some people have multiple policies and one of the very regular areas new clients seek advice from us surrounds pension consolidation. There is no simple answer for all, it is very much individual advice given after establishing and understanding your aims and objectives. Pension plans can vary significantly, and all aspects of each policy needs to be understood before advice can be offered.
Detailed below are some areas to consider.
The death benefits can vary significantly and at present do not typically form part of your estate. It is very important to know and understand the rules of each scheme as it affects you and your family/beneficiaries. Older policies can tend to be more restrictive particularly in relation to payment to named beneficiaries.
Policies established more recently e.g., SIPPs (Self Invested Personal pensions) and personal pensions can offer greater flexibility particularly in relation to how beneficiaries can access your funds, and this can lead to a greater tax efficiency.
Seeking expert advice in these areas is always recommended particularly in keeping up to date with current legislation.
It is fair to say that many are not fully aware of where their pensions are currently invested and having several policies complicates the situation further. Understanding where you are invested – and where you are NOT invested is key to the service BRI provides. Consolidation of pensions can offer this clarity and allows for easy review on a regular basis particularly as one nears retirement age and lifestyle changes are being planned.
Simplification and control
Having one consolidated pension managed by BRI, if appropriate, not only helps simplifying the investment strategy and the administration (which will also undoubtedly help your beneficiaries) But also gives you control and understanding of a very key and valuable asset often ignored in the hope it will work out well. Once established, the regular reviews with our advisers help build knowledge and confidence in all aspects of financial planning for the family.
When looking at pension consolidation it is always important to consider costs. Costs to be mindful of are the underlying fund charges and the plan and administration charges of the provider.
In some instances, typically where clients have much older style pension contracts, they can be paying high underlying fund charges for what is a restrictive investment selection. This can be a factor in transferring to a more `modern` pension contract which can offer access to a wider range of independent funds.
Alternatively, in some cases, clients have very competitively costed plans which have arisen from workplace pensions receiving a scheme discount. Even if you are no longer an employee or active member of the scheme this discount will usually remain in place. These contracts can again restrict access to a wider range of funds and an analysis needs to be carried out against the cost savings and whether the fund range is offering an appropriate investment strategy.
It is always important to consider what you are receiving for the cost. In some cases, the pension consolidation may in fact increase charges, but this needs to be balanced against the potential investment strategy, the provider service and functionality of the pension contract and any professional advice you receive following the consolidation, which may justify the increased cost.
Following the changes in pensions legislation introduced in 2015, flexibility has become a key element of considering whether pension consolidation is appropriate.
For some, being able to access their pension flexibility via `Flexi-Access Drawdown` is important for managing their cash flow needs, income tax and Inheritance Tax (IHT) liability and consideration of circumstances and needs will need to be taken into account. Flexi Access drawdown enables you to draw as much or as little from your pension as needed and can be tailored to your tax position through a combination of tax-free cash (if available) and taxable income.
Given the IHT benefits of defined contribution pensions, opting for the previously typical annuity route may not be appropriate for clients who do not need to receive a regular income from their pension if they have income from other sources. By drawing income that is not needed from a pension, it would potentially sit in the taxable estate for IHT (40%) rather than remain in an IHT free wrapper.
Not all pension contracts offer flexi-access drawdown, although more providers are adapting and starting to offer this income option. It may be that although a contract is not flexible, there are other considerations to take into account such as a plan having competitive costs, a guaranteed annuity rate etc and these factors would have to be analysed to weigh up what is in the best interest of the client and their needs. In some cases, where there are existing guarantees and competitive charges with the current provider, it can be that a plan remains in place with them until the point of retirement and then if flexibility is sought, a transfer can take place at the point it is needed.
As with all pension advice, a thorough understanding of a client’s needs and circumstances is needed along with an analysis of existing arrangements before any advice can be provided. Our financial planners are available to assist you with any questions you may have around this area of financial planning.