You will know that the UK labour market has changed a lot over the years. On average, UK residents switch jobs 11 times during their working life. As a result, perhaps exacerbated by the fact that all employers are required to automatically enrol their workers (subject to certain criteria) into a pension plan, nearly two thirds of UK adults have multiple pension pots.
We also know that we tend to move home more frequently earlier in our careers. Why is this relevant when considering pensions? Well, it could mean that people lose track of their pension pots. This point was illustrated in research conducted by ABI which revealed that their pension tracing service had seen requests for help increase by more than 430% over the last decade!
The Government’s Pensions Dashboard Initiative is working towards establishing a central location where everyone can view all of their pension pots on one website, including their state pension. However, this project has been subject to many delays since it was first announced in the 2016 Budget. It’s a complex process and testing is scheduled to start in 2022, with staged onboarding from 2023.
Meanwhile, you may be faced with questions from your employees as to whether it would be beneficial for them to consolidate several small pensions pots into one place. This would seem to make life easier, but is it advisable?
Consolidating pension plans into one arrangement certainly can be the right thing to do and it can sometimes have quite a positive impact on members’ retirement savings. However, transferring pension savings from one plan to another could potentially see members miss out – perhaps through the loss of valuable guarantees that aren’t straightforward and not always clearly explained.
So, what are the pros, and what are the cons?
As you can tell from the above, the pros and cons of consolidating pots can vary from scheme to scheme. We have listed some of these below – but this is far from an exhaustive list. There could be other considerations, for example investment performance and / or whether the pot forms part of a divorce settlement, as well as employees’ personal circumstances and objectives.
| Possible pros | Possible cons |
|---|---|
| Everything could be in one place. This could make it easier for employees to plan, and in turn help them to be more informed as to whether or not they are on track with their retirement plans. | Employees could find themselves losing some guarantees that their existing pension may have. These tend to be the preserve of older arrangements – with modern schemes being far ‘cleaner’ – but it would definitely be best to check. |
| It could mean that employees pay lower charges – which would in turn mean that their fund would not be impacted as much. | Charges could be higher – employees will only know this when this has been checked. |
| It could help employees have an investment approach for all of their retirement savings that is right for them, taking into account attitude to risk, retirement goals and perhaps considerations like environment, social and governance characteristics. | Employees could lose any enhanced tax-free cash entitlement. |
| Employees could benefit from being able to choose from a wider range of investment options. These could include things such as commercial property and directly held shares. | Employees could lose any additional insurance benefits. |
As with most things to do with pensions, a decision to consolidate pension pots should not be taken lightly and each case must be considered on its own merit. Employees should be advised to seek individual financial advice, which we would be happy to provide to your group scheme members.
What will the Brunsdon Financial Adviser need to know?
Before making our recommendations, our Adviser will ask your employee(s) a number of questions. For example:
- What kind of pension scheme is it?
Some pensions offer a ‘defined benefit’ others are ‘defined contribution’. If the employee has what’s called ‘safeguarded benefits’ – in particular, if they’re in a ‘defined benefit’ scheme or have a guaranteed annuity rate – and their transfer value is more than £30,000, they will have to take regulated financial advice before they can transfer. Please note that Brunsdon Financial Advisers are not permitted to advise on ‘defined benefit’ scheme transfers. - Is the employee entitled to an enhanced level of tax-free cash?
This is sometimes the case with older pension plans, which means that if the employee transfers their fund away, they could pay tax on a larger proportion of their pension fund when they come to take benefits. - How do the pension scheme charges compare?
Would a transfer mean a reduction in pension charges? - Would any benefits be lost by transferring a pension fund to another scheme?
Sometimes, (usually older) pension arrangements provide guaranteed growth rates, guaranteed bonuses or guaranteed annuity rates, which may not be replicable elsewhere. - Is the transfer value different to the fund value?
Sometimes we see this with older ‘with profits’ funds in which your employees may be invested. If this is the case, they can still transfer away but it means there will be a financial penalty for doing so.
The answers to these questions will need detailed interpretation by our experts before the appropriate recommendation is made.
Please do get in touch with your Brunsdon Employee Benefits Consultant for help to support your employees to make the right decisions about pension pot consolidation* – or indeed any other aspect of group pension or employee benefits schemes.
*Please note that initial consultations are free of charge. However, additional charges may apply for subsequent meetings or advice.
The information provided does not constitute advice or recommendation. Pension funds can fall as well as rise, irrespective of the level of risk chosen, and the value of a pension and any income generated from it cannot be guaranteed and can fall as well as rise as a result of market volatility. You may not get back the amount you originally invested.
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