Pension Consolidation is an issue that government minister Steve Webb wants the pension industry to tackle. The need is obvious, as you go through your working life you may acquire several different “pension pots”. You may have worked for several different companies, or the company you worked for may have gone through mergers and acquisitions. So it makes sense to be able to “consolidate” all those smaller pension pots into one larger pot.
Two of the biggest UK pension providers – Standard Life and the Prudential – are discussing one solution, a free online “Consolidate my Pension” service… a “pensions clearing house”. But this would be an “execution only” service, meaning that it would only be suitable for professional advisers working on behalf of their clients, or highly financially-savvy individuals who are confident navigating their way through the jungle of options and clauses involved. It would also require every UK pension provider to sign up to the scheme, which is a huge job!
But, as a recent Citywire article points out, even the idea of pension consolidation is much more complicated than it seems at first. Each pension may have additional benefits that must be assessed carefully against the transfer value being offered by the pension provider to see if the value is reasonable… and that is not a simple task –
“For the unwary and those who don’t have the benefit of advice an execution-only consolidation platform is fraught with danger – even if individuals are consolidating only ‘money purchase’ defined contribution pensions. Will investors have sufficient experience to know that they could be giving up hugely valuable guaranteed annuities on personal pensions, particularly if the policies were written many years ago when annuity rates were much higher than today?
Many may want to consolidate their pension policies only to discover that there are huge penalties for doing so, particularly if they are ‘with profits’-type policies subject to a punitive ‘market value adjuster’. What about increases in charges which, over time, can seriously diminish the value of the ultimate pension pot? A rise in charges from 1% a year to 1.5% a year may not sound much, but over 20 years it will have a significant detrimental impact on the accumulated savings.
One of the major problems is that for a person with, say, four pensions each worth around £3,000, the cost of advice is out of proportion to the amount involved. Most IFAs need to charge around £125 an hour, and it could easily take four hours to establish if just one former employer’s offer of a transfer value is reasonable, let alone four.
The answer for most will be to take an active interest in their pension savings – and not transfer out of a final salary linked scheme. If the individual has several pension pots from former employers which are linked to final salary, they need to keep tabs on them. This can be done through the tracing service offered by the Pensions Service. The Pension Tracing Service has access to information on more than 200,000 pension schemes.”
Click here to visit the Government’s Pension Tracing Service website. And, as always, if you are unsure consult a qualified Financial Adviser before taking any action that may affect the future value of your pension.