According to widely cited numbers from the US Bureau of Labor Statistics, the average employee stays in each job for 4.4 years and averages 10 to 12 jobs over a lifetime. Some surveys of millennials point to less than 3 years in each job, and in some cases over 20 in a lifetime.
This has huge implications for retirement planning – whereas before you had one or two old age pensions from your employers, which, thanks to high interest rates yielded decent returns even if they weren’t brilliantly managed – now you might have a dozen pension funds with low returns.
We’ve discussed the pros and cons of consolidating your UK pension plans here. As a quick recap, consolidating your pension funds has a number of benefits:
1. You are less likely to lose track of funds you are entitled to
2. You can better monitor whether your old age pension is being well managed
3. Your retirement planning is easier because you have a clearer view of how much you have to save, what assumptions you should put in your pension calculator, and how big you can expect your pension fund to be on retirement.
4. You can choose options with better investment flexibility and performance and lower fees (and, in some cases, such as for expats opting for QROPS, lower taxes too).
Let’s look at this from the perspective of various types of UK Pension Plans:
1. State Pensions (sometimes also referred to as the national pension scheme). These are defined-benefit schemes backed by the government rather than by a pension fund, so it is not possible to transfer or consolidate them.
2. Teachers Pensions. These are defined-benefit pensions. According to recent rules, you can only transfer them into other defined-benefit pensions, and private-sector defined-benefit pensions are hard to come by, so generally you wouldn’t consolidate this kind of pension.
3. Occupational Pensions. If your employer pensions are defined-benefit or final-salary schemes, as in the case above, you would typically keep the pension where it is. In the case of defined-contribution schemes, once you have left the employer, it usually makes sense to consolidate them into a pension that has adequate performance, fees and investment flexibility.
Note that this does not mean that you should consolidate into your current employer’s pension fund, which may not be the ideal choice for you in the long term, and from which you might also leave. Typically, it does make sense to contribute into your current employer’s pension plan if they match your contributions (don’t turn down free money!) even if investment performance and fees aren’t ideal. But once those employer contributions are no longer coming in, choose the best option for you.
Also, some pension funds do try and stop you from leaving by imposing high exit fees, so that is something to take into consideration when calculating the benefits consolidation and also something to avoid when choosing the fund you are looking to consolidate into.
4. Personal Pensions. Personal Pensions are set up by yourself, which gives you much better control and flexibility. For example, with many Self-Invested Personal Pensions (SIPP) you can choose from thousands of investment options over the internet, just like you would at a broker or ‘fund-supermarket’. And remember – pensions are regulated structures which, up to certain levels of contribution, provide special tax incentives. So whether or not you have pensions linked to your employers, it could make sense for you to set up a personal pension plan to enjoy the favourable tax treatment.
In short, apart from fees and certain kinds of pension which can’t or shouldn’t be transferred, consolidating your UK Pension Plans has a number of benefits.
If you are doing research for your retirement planning, the UK government has a number of useful resources, such as the pages of the pensions regulator, pensions calculators, and even a service for tracing lost pensions.
Because the sums involved in consolidation are quite substantial, and because financial expertise and experience with the bureaucratic processes can be very helpful, it might make sense to hire an expert to provide you with custom advice and make sure that everything flows well. Visit PlanYourFinances.com if you’d like to read more articles with tips on retirement planning.