Continuing our blog series looking at finances and investment, Francis Jarman, Chartered Financial Planner at Renaissance Financial, explores the issue of pensions and retirement planning.
Once upon a time a UK worker would have had a very straightforward view of their employment path. They would likely serve an apprenticeship or formal training, receive some service awards after ten, fifteen or twenty years, after that possibly a gold watch or – as one of my clients received – a paid year of service and £10,000 in holiday vouchers to see the world, all before retiring on a gold-plated index linked pension, living happily ever after.
Today that scenario is more like a fairy tale, a fact that is endorsed by a recent survey conducted by an Insurance Company, which found that on average a UK worker will change employer every five years.
Whilst many people see the changing of employer regularly as a way to advance their career and to upgrade their status and benefits, the reality is that it can cause havoc when it comes to assessing and targeting their retirement plans.
The majority of people now have a number of pensions pots set up under different rules, with a variety of different providers and whilst ‘Pension Simplification’ was introduced in April 2006 to reduce the complicated patchwork of legislation affecting different schemes and merge the previous eight tax regimes into one single regime for all individual and occupational pensions, most modern workers feel that they just have a collection of disparate pots that cannot be translated into a coherent retirement plan. This may leave a person quite anxious about how, when and if, they can retire in the future.
Is there a solution to the common scenario?
One solution could be Pension Consolidation
There are some key considerations when consolidating your pension arrangements into a single plan. These include:
- Simplicity of having your pension funds in one place
- Clear understanding of your total pension value
- One overall charging structure
- One investment mandate – with funds invested in-line with your attitude to risk
- Ease of Administration for retirement options
Just consider that last point (number 5) for a moment – when it comes to accessing your pensions at your chosen retirement date, if you haven’t consolidated your funds, you’d have to contact each provider individually – assuming you still know where all your pensions are.
Depending on how you wish to draw your pension, you’d then have to wait for each provider to either pay out the pension as cash, buy an annuity or move the plan into flexi-access drawdown. The process can take months and can be costly. Unfortunately, not every provider offers a full range of options with their older pension plans and so you may be forced into taking benefits in a less favourable way.
The need to take good planning advice
Consolidation, however, is not always the right thing to do, as many older plans have hidden benefits, like Guaranteed Annuity Rates or Enhanced tax-free cash. To consolidate these pensions would mean you lose the valuable benefits that you may have. Furthermore, some older company pensions may be defined benefit pensions that may provide a valuable core of guaranteed income, and these are the gold-plated schemes that was the norm for many employees years ago.
So, whilst Pension Consolidation in principle is a good idea, the real key message is to obtain good advice from a qualified professional adviser who will be able to investigate each plan and advise on the pros and cons of consolidation for each pension pot you have. They should provide you with a well-structured retirement plan that may include consolidation of some pension plans as well as utilising the enhanced benefits of any pension plans that have built in guarantees. In other words, a specialist will be able to make a bespoke retirement plan for you, taking into account the different pensions you have and how they can work as hard as possible for you in the future.
Consolidating is a straightforward process and although an initial fee would be involved, in the long run you would be in a better position to understand how your retirement fund can meet your future needs, quite likely in a more cost and administratively efficient way.
Being able to understand how much your pension fund is worth and how those benefits can assist in planning retirement can be very empowering and give you more control to determine how and when you take on the next stage of life’s journey.
Looking for more advice?
Renaissance Financial is an FCA-regulated company, and the expert team there provide investment and wealth management services, including retirement and Inheritance Tax Planning.
For more information about Renaissance Financial or to arrange a consultation with one of our experts about your individual circumstances, please contact 01273 023770 or email firstname.lastname@example.org