Gone are the days of 30-year careers in a single company, ending at 55, with a nice defined-benefit pension plan and an engraved watch as a good-bye present. The average person, will most likely have worked for at least 13 employers before 55.
13 different pension funds can be a mess. So let’s have a look at the pros and cons of transferring money between pension schemes.
Pros of consolidating your pensions
Not losing track of any money you are entitled to, and making sure that what you have is properly invested.
With our lives being so busy and crowded with information, it’s easy to lose track of priorities. We over-optimize on one decision and completely forget about another. The same person who frets about the relative prospects of the US vs. European stock markets might well have a substantial part of his savings sitting idle – a mistake that is costing him much more than he can ever hope to gain from trying to beat the US market. We also procrastinate – deep down he knows that he should really do something about those funds, but is put off by the onerous paperwork.
We’re human, not perfect, and we should take that into account. By consolidating pension plans, you make life easier for yourself and avoid procrastination and silly mistakes. All your pensions are in one place. You choose and monitor one portfolio. You have one statement to look at, and so on.
You consolidate once and everything is easier after that.
Improved investment flexibility, performance and lower fees.
When it comes to personal investments, there is a general rule – for any kind of investment anywhere in the world – that the larger the amount you are looking to invest, the better flexibility and performance and the lower the fees you can achieve.
It may seem a bit unfair, but really it’s like any other business – you’re simply a bigger and more attractive customer, and any fixed or transaction costs are also a lower percentage of the total amount. With pensions, this is sometimes less obvious because schemes are subject to a fair amount of government regulation. But even so, with a £300,000 pot, you will find more attractive alternatives than with £30,000.
Access to alternative pension structures. Consolidating a pension is also a good opportunity to choose the best structure for your particular needs. For example, let’s say you are an expat and it’s looking less likely you will retire in the UK. One of the most attractive pension structures for you would probably be the QROPS – a Qualifying Recognized Overseas Pension Scheme, which we’ve discussed in lots of detail here, here and here. On the other hand, if you are in the UK, you might want to go for a SIPP – a Self-Invested Personal Pension – a pension that functions like an online fund supermarket in which you can choose from many (nowadays thousands) of investment options over the internet.
The Cons of Consolidating
With all the benefits of consolidation above and more and more people opting to consolidate, of course traditional pension plans would love to keep you right where you are. And what better way to do that than hit you with excessive fees? Here it’s a matter of doing some pension calculations to understand how much better your performance has to be to make up for these fees.
Losing Defined Benefits and Employer Contributions.
Defined benefit plans are increasingly rare, because they provide pensioners with an awfully good deal – fixed pension payments, for increasingly long lives, despite very low investment returns. So if you have one of these golden geese, it may not always make sense to consolidate it into a defined-contribution plan. Another case where it wouldn’t make sense to move is if your employer is matching your contributions into a company-sponsored plan – you wouldn’t want to turn down free money, of course.
Looking at the pros and cons of pension transfers above, it’s clear that the pros apply in general, while the cons apply to specific cases. If you have many pensions, it most likely makes sense to consolidate some of them, even if not all of them.
Pension consolidation is also a great moment to discuss your overall finances with a professional advisor. That way you can be confident that your big shiny new pension pot is nicely invested according to your personal financial needs.