Part one of this series was about the potential cost savings you could make. Here we explain how bringing your pensions together could give you more control over your life and finances.
The huge savings you could potentially make by consolidating your pensions is just part of the story because there are some major intangible benefits too.
I say ‘intangible’ because what price would you put on your time, peace of mind and greater sense of control? But the fuller truth is that these added benefits could also help you to maximise your income potential once in retirement.
Here are five more reasons to consider consolidating your defined contribution (DC) pensions within a low-cost self-invested personal pension (SIPP).
1) Greater clarity and no more hidden costs
Not all pensions are the same.
Aside from the different types of pensions – including DC pensions and more traditional defined benefit (DB) schemes1 – there can be big differences in fee structures from pension to pension.
Some pensions may even charge you for accessing your own hard-earned pension savings when you retire!
By bringing together your different pots within a Vanguard SIPP, you get greater clarity – just one fee to rule them all and no more hidden costs.
Be aware though: you may face transfer charges from your existing pension provider, so make sure to factor that into your calculations. At Vanguard, we don’t charge for transfers, whether in or out of our SIPP.
2) Greater flexibility
Not all pensions have the same features.
Following the pension freedoms introduced by the government in 2015, people can access their DC retirement savings from as early on as aged 55 (rising to 57 in 2028). And they can do so in a variety of ways. Instead of the annuity (or guaranteed income) products that most people used to have to buy, retirement investors now have more choice.
They can access their funds as and when required, rather than commit to a regular income. They can gradually take from their tax-free cash-lump-sum entitlement worth up to 25% of the total pot and leave the rest alone so as not have to pay income tax on it at their highest marginal rate at the time, or they can take from both portions of their pension concurrently or opt to withdraw just taxable income.
They can also withdraw money in a way that doesn’t affect their capacity to continue saving for their future retirement. This can be useful, for example, if they want to take a work sabbatical or need to top up their earnings while retraining or switching to a more engaging but less lucrative job.
How exactly each person does it is down to them and will be shaped by their own circumstances, including any tax considerations and future plans.
However, pension schemes are not obliged to offer more flexible drawdown options, so not all of them do. Consolidating your pensions within a SIPP can therefore help you to bypass such risks, so you’re always in control.
3) More coherent drawdown strategy
Drawing money from one pension rather than multiple pots can also help you to avoid expensive mistakes because it enables you to be more precise with your spending and financial planning.
That is very important because more freedom means more personal responsibility and more potential room for error, which is a worry when you consider how often people underestimate how long they will live and how long they might need their retirement savings for. Data from the Financial Conduct Authority (FCA) showed that 43% of pension withdrawals last tax year ran at an unsustainably high rate of 8% or more2.
Consolidating your DC pension pots into one would potentially improve your field of vision. It would also discourage a tendency observed by one government study3 for retirees to spend the money held in smaller pension pots in one go, rather than integrating it into their broader financial planning and maximising how far their savings can stretch.
4) More coherent investment strategy
If you’re still years away from retirement, having your retirement investments in one place can also help you to focus more on the kind of retirement you’re heading towards and what you might need to do to get the kind of retirement you want.
You can spot funding gaps more quickly and do something about it before it’s too late. You can also make the most of your DC pension’s flexibility by weighing up the costs and benefits of retiring earlier or later and better calibrating the transition between work, semi-retirement and full retirement.
By seeing all your pension investments together, you are also better able to ensure you have a coherent investment strategy. Rather than having to weigh up your holdings across multiple portfolios, you can analyse it all in one place.
Is your asset allocation appropriate for your goals? When should you consider de-risking your portfolio by switching between shares and bonds? Do you need to rebalance your portfolio? These are the sorts of questions you’ll be better positioned to answer by consolidating your pensions.
5) Less paperwork in the long run
Finally, let’s be clear about the paperwork that might be involved. Sure, finding out what pensions you have and where they all are may involve a little initial digging and form filling to get them all in the one place4.
You may also have to familiarise yourself with some concepts and be prepared to ask different pension providers the odd question – not least the transfer value of your pension.
Any DB pensions are probably best left alone, but there are also tens of millions of DC pots currently out there5 and many may be ripe for consolidation6.
And once you get over the initial admin and detective work, there will be less hassle going forward: just one set of annual statements to read and just one provider to deal with when it comes to managing your hard-earned savings and choosing your options in retirement.
1 These pay a guaranteed income depending on your final or average salary and are funded by employers. In general, DB pensions are usually not suitable for consolidation and are becoming increasingly rarer in the private sector.
2 ‘Retirement income market data 2020/21’, Financial Conduct Authority, December 2021.
3 Pension Freedoms: a qualitative research study of individuals’ decumulation journeys’, Department for Work & Pensions, October 2020.
4 If in doubt, the government provides a pension tracing service.
5 A recent government study of workplace pension schemes covered almost 30 million DC pots.
6 Some DC pots may also have protected benefits, so make sure to ask your pension provider and be clear about these before initiating a transfer.
Investment risk information
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
Eligibility to invest in a Vanguard Personal Pension depends on your individual circumstances. Please be aware that pension and tax rules may change in the future and the value of investments can go down as well as up, so you might get back less than you invested. You cannot usually access your pension savings or make any withdrawals until the age of 55.
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