6 Reasons Why You Should Consolidate Your Retirement Savings7th July 2015
If you are like most people in the UK, you probably have your phone, internet and TV consolidated with one provider. It’s cheaper and more convenient. Fewer are aware of the same principle applying to retirement savings, particularly pensions. Indeed, with complex tax rules and constantly changing laws, the advantages of getting all your retirement savings under one umbrella are even more far-reaching.
1. Lower Costs
Cost saving alone would be a sufficient reason for consolidating. While some charges are percentage based, there are also many fixed fees – per transaction, per fund or per account. If you invest in the same assets through five different plans, you may be paying five times more in fees than necessary. Over many years and across many funds (and with the compounding effect on top), these fees can add up to substantial amounts.
2. Not Losing Track
The world has changed in the last decade and it is now very common to have ten or more jobs throughout one’s career (11 is the average according to former Minister for Pensions Steve Webb). Many people accumulate a high number of different pension schemes and they often lose track of some over the years. For every pension plan or other financial product you have, you must notify the provider whenever you change home address, job or other essential details, which can quickly become overwhelming. According to the Department for Work and Pensions, estimates suggest that there could be as many as 50 million dormant and lost pension pots by 2050.
3. Easier Management
Making sure your personal details stay updated everywhere is only a small part of the ongoing management that your retirement savings require. You must also regularly review your goals, upcoming liquidity needs, constraints, tax consequences and compliance with the constantly changing rules. Doing these things with one pension plan is hard enough and the more fragmented your savings are, the more work it is.
4. Easier Asset Allocation and More Opportunities
Asset allocation is the most important factor which determines the performance of your savings and the amount of money you will eventually be able to enjoy in retirement. It makes no sense to decide on asset allocation for each of your pension plans or investment accounts separately; you must always consider all your assets as a whole. Implementation of investment decisions is also much easier on one large account. Some assets (like hedge funds or other alternative funds) have higher minimum investment amounts and therefore may be inaccessible to those with fragmented savings and small accounts.
5. Flexibility at Retirement
Having your pension plans consolidated allows for greater flexibility and tax saving opportunities at retirement. The closer you get to retirement age, the more important it is to keep a close eye on all the various allowances (like the Lifetime Allowance, which has been drastically reduced recently), thresholds and tax planning opportunities.
6. Death Benefits
In the event of death, the objective is for the family to keep access to the pension savings, maintain as much of the flexibility (lump sum vs. annuity) as possible and avoid paying more tax than absolutely necessary. Unfortunately, when the funds are held under multiple different pension plans and particularly when some of the schemes are older or small in size (with balances below drawdown minimums), the outcome may be less favourable. For the maximum level of protection of your family, for their convenience and to ensure your wishes will be followed, keep your pension consolidated under a modern, fully flexible and tax efficient scheme.
Costs and Other Considerations
With many strong advantages, it is clear that most people would benefit from moving all their retirement savings to one place, whether they are young or approaching retirement. However, pension transfers can be quite complex and they come at a cost. Before making the decision, you must be aware of the various transfer fees, other charges, tax implications and also plan-specific benefits which you may lose when transferring your funds away. Seek advice of a retirement planner or financial adviser (and make sure they are independent).