Pension Planning |
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Should you combine your pensions? By Jeff Salway
The job-for-life era is long-gone and today's school leavers can expect to have up to a dozen jobs in their working life, compared with the average seven jobs that today's retirees have held. If you take a pension with a You may want to think about transferring your pension before you retire. There are no official figures for the number of people switching pensions, but since A-Day last April, when new pension rules came into effect, independent financial advisers (IFAs) have reported a sharp rise in pension transfer enquiries. There's a number of factors you should consider when deciding whether to transfer or consolidate all your pensions into one plan. David Fitches, senior technical adviser at IFA network Sesame, frequently gets requests from clients who want to switch out of excellent pension schemes simply because they want to nothing more to do with their previous employer. The biggest reasons for transferring pensions, however, are a desire for better performance or the need to have all your pension eggs in one basket. According to Bestinvest, the best-performing pension could produce more than three times more annual pension than the worst-performing one, with those run by life offices the worst culprits. Closed pension schemes can be particularly underwhelming for those stuck in them. The right questions The first thing you need to do is ask your pension provider/s how much your pension fund is worth and what its value will be if it stays where it is. Then ask them for a projection of what it'll be worth when you retire, if you leave it where it is. Make sure this takes the effect of charges into consideration - this is known as the reduction in yield (RIY). When you've got an idea of the projection of your existing pensions and the penalties the provider/s would levy if you transferred, contact a selection of other pension providers and ask them for a projection of what the amount you transfer would be worth at retirement, taking charges into consideration. Bear in mind that this is just an estimate, not a guarantee. Penalties for moving vary with the type of pension. Since 2001, pension plan charges have fallen substantially, and this can make a massive difference to the fund you build up. When it comes to charges, it's also important to remember that one large pension pot will be much cheaper to run than several smaller ones, and it's also likely to give you a better rate when you need to buy an annuity. Some older contracts have a number of charges built in, including initial charges, fund charges, annual charges and policy fees. Higher charges can also mean higher transfer penalties. If it's a simple case of wanting to move to something offering better returns with lower charges, it usually comes down to how heavy the transfer penalties are. This is where expert advice can come in useful, as it's a question of calculations. If moving to a pension with low charges is a priority, stakeholder is one option. Stakeholder pensions have charges of 1.5% for 10 years and 1% for the rest of the term, which compares very favourably with other pension types. If retirement is close, the savings would have to be pretty substantial to justify moving when penalties are hefty. Other factors If yours is a retirement annuity it's especially useful to know what the death benefits are, as they could be based on premiums and not the fund. If you have a scheme that offers guaranteed annuity rates, the chances are that leaving it could cost you a fair bit of money. For example, if it guarantees an annuity rate of 15%, transferring it to current rates would mean a drop to around 5%, a huge difference over the long term. So even if the terms, fund options and charges are more attractive elsewhere, it may be worth sticking with your original plan. There are some old-style capital units pensions where the charges are spread out over the life of the contract. This often means that the value that can be transferred is substantially below the value of the plan, because charges not already levied are deducted from the total. If you're close to retirement you may be better off staying where you are. Similarly, if your pension is invested in a with-profits fund, there's a good chance performance is well below that of several years ago. This is partly because the amount that most with-profits funds invest in equities has been cut. If you're a long way from retirement, this could make with-profits pensions unsuitable for you, regardless of performance, so it could be worth finding out the asset allocation of the fund. Ask what the market value reduction is, assuming there is one. Also look into the financial strength of the life office running the with-profits fund, as this can affect the security of your returns in the long run. Final salary schemes If you're still in a final salary scheme, make sure you consider any transfer decision very carefully. Final salary schemes can be a particularly tricky area to address in terms of transfers, so advice is essential. You should also ask if transferring pensions affects how much tax-free cash you can take from your pension. Currently, you can take 25% of your pension tax-free in cash, but some types of pensions, such as 'Section 32' policies and some executive pension plans entitle you to more. If you're very close to retirement, check how long the transfer will take. In some cases, it can take months, and transfers aren't permitted on or after the normal retirement date. Flexible SIPPs If you have a fund of at least £50,000 and you want it all in one place so you can invest in various assets and monitor it more easily, you may want to think about using a self-invested personal pension (SIPP). The big appeal of transferring all (or part) of your pension into a SIPP is the investment freedom, as they allow investment into a wider range of assets, such as commercial property and shares. This flexibility is ideal if you want to diversify your investments, but probably not if you only need exposure to a handful of funds. Expert advice A good IFA will be able to give you a better idea of how much you would benefit from switching to a different plan. To find an IFA specialising in pension transfers in your area, go to unbiased.co.uk.
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