Bringing your pensions under one roof

Most people, during their career, accumulate a number of different pension plans. Keeping your pension savings in a number of different plans may result in lost investment opportunities and unnecessary exposure to risk.

However not all consolidation of pensions will be in your best interests. You should always look carefully into the possible benefits and drawbacks and if unsure seek professional advice.

Keeping track of your pension portfolio
It’s important to ensure that you get the best out of the contributions you’ve made, and keep track of your pension portfolio to make sure it remains appropriate to your personal circumstances. Consolidating your existing pensions is one way of doing this.

Pension consolidation involves moving, where appropriate, a number of pension plans – potentially from many different pensions’ providers – into one single plan. It is sometimes referred to as ‘pension switching.’

Pension consolidation can be a very valuable exercise, as it can enable you to:

Bring all your pension investments into one, easy-to-manage wrapper

Identify any underperforming and expensive investments with a view to switching these to more appropriate investments

Accurately review your pension provision in order to identify whether you are on track

Why consolidate your pensions?
Traditionally, personal pensions have favoured with-profits funds – low-risk investment funds that pool the policyholders’ premiums. But many of these are now heavily invested in bonds to even out the stock market’s ups and downs and, unfortunately, this can lead to diluted returns for investors.

It’s vital that you review your existing pensions to assess whether they are still meeting your needs – some with-profits funds may not penalise all investors for withdrawal, so a cost-free exit could be possible.

Focusing on fund performance
Many older plans from pension providers that have been absorbed into other companies have pension funds which are no longer open to new investment, so-called ‘closed funds.’ As a result, focusing on fund performance may not be a priority for the fund managers.

These old-style pensions often impose higher charges that eat into your money, so it may be advisable to consolidate any investments in these funds into a potentially better performing and cheaper alternative.

Economic and market movements
It’s also worth taking a close look at any investments you may have in managed funds. Most unit-linked pensions are invested in a single managed fund offered by the pension provider and may not be quite as diverse as their name often implies. These funds are mainly equity-based and do not take economic and market movements into account.

Lack of the latest investment techniques
The lack of alternative or more innovative investment funds, especially within with-profits pensions – and often also a lack of the latest investment techniques – mean that your pension fund and your resulting retirement income could be disadvantaged.

Significant equity exposure
Lifestyling is a concept whereby investment risk within a pension is managed according to the length of time to retirement. ‘Lifestyled’ pensions aim to ensure that, in its early years, the pension benefits from significant equity exposure.

Then, as you get closer to retirement, risk is gradually reduced to prevent stock market fluctuations reducing the value of your pension. Most old plans do not offer lifestyling – so fund volatility will continue right up to the point you retire. This can be a risky strategy and inappropriate for those approaching retirement.

Conversely, more people are now opting for pension income drawdown, rather than conventional annuities. For such people, a lifestyled policy may be inappropriate.

Overseas consolidation
Most UK pension plan members are able to consolidate their benefits to other approved pension schemes. For those living overseas or those with overseas pension schemes, it may also be possible to transfer their benefits to pension schemes outside of the UK.

Qualifying Recognised Overseas Pension
Scheme (QROPS)
The procedure for overseas consolidation has been simplified significantly since April 2006. Now, as long as the overseas scheme is recognised by HM Revenue & Customs (HMRC) as an approved arrangement (known as a Qualifying Recognised Overseas Pension Scheme (QROPS)), the consolidation can be processed just like a transfer to a UK scheme.

A QROPS is a pension scheme set up outside the UK that:

Is regulated as a pension scheme in the country in which it was established

It must be recognised for tax purposes (i.e. benefits in payment must be subject to taxation)

UK schemes, when they receive an application to consolidate benefits overseas, must refer to the QROPS list. If the overseas scheme is included, the consolidation can proceed.

If the overseas scheme is not included, it can apply to HMRC for QROPS approval.  If approval is not granted, the consolidation cannot proceed.

Contracted out schemes
There are further requirements if the consolidation payment includes a contracted out benefit (i.e. a Guaranteed Minimum Pension or Protected Rights). Before the consolidation can proceed, the UK scheme must:

Obtain written confirmation from the member that they understand the risks in consolidating this type of benefit overseas because the overseas scheme may not provide the same degree of security or priority to the contracted out benefit

Take reasonable steps to satisfy themselves that, where the overseas scheme is an occupation pension scheme, the member has entered the relevant employment

Take reasonable steps to satisfy themselves that the member has received a statement from the overseas scheme showing the benefits to be awarded in exchange for the consolidation payment

Consolidating your pensions won’t apply to everyone
The potential benefits of consolidating your pensions won’t apply to everyone, and there may be drawbacks to moving your pension plans – particularly so for certain types of pension. It is therefore vitally important to carefully consider all aspects of your existing pensions before making a decision as to whether or not to consolidate.

As well as whether the total size of your pension funds make consolidation viable, Issues to take into account include whether your existing pensions have:

Loyalty bonuses

Early termination penalties

Guaranteed annuity rates

Integrated life cover or other additional benefits

Final salary pension benefits