The days of working for one employer all your life are over.
With multiple jobs comes multiple pensions and with most workers due to be Automatically Enrolled into a pension, between now and 2018, the problem is set to get worse.
Indeed, research from NOW Pensions has emphasised the problem face by workers:
- 25% of over 55’s have four or more pensions
- 60% of over 55’s have had four or more jobs
- 32% of people said they didn’t know which companies their pensions were held with, whilst 25% said they didn’t tell their pension company when they move house
It is often thought that people pay little interest in their pension, the NOW Pensions survey shows this not to be true:
- 39% of people would like their pension pot to follow them when they change jobs
- However, 81% of people surveyed said they would worry about their pension pot following them to a poorly performing alternative
- More, 86% of people, said they would worry if charges on their new scheme were higher than an old plan
Keeping track of pensions
It’s clear that keeping track of where your pensions are held is hard, let alone monitoring their performance and the charges you are paying.
If the Steve Webb, the Pensions Minister, has his way, pension pots built up whilst you are working, will follow you from job to job. But that’s some way off and won’t solve the problem of existing pensions, which you might find hard to keep track of.
So what are your options?
If you are one of those people with multiple pensions you have a range of options, from leaving the plans where they are to consolidating one or more of them together.
We’ve put together five tips to help you.
Tip #1: Take action, track down your plans
It’s obvious, but your pension will provide you with your income in retirement. As boring as it may seem, it’s vital you, or an Independent Financial Adviser (IFA) on your behalf, regularly monitors your pension.
Over the years high charges or poor performance can erode the value of your pension pot. To put it another way, you would expect to suffer from tooth decay if you didn’t visit the dentist; you can avoid pension decay by monitoring your pensions!
The starting point is to track down existing plans; an IFA can do this for you, or you can do it yourself. If you take the DIY route, you’ll need to look up old statements, and write to the pension providers for information.
If you can’t remember who a pension was held with, you should use the online Pension Tracing Service, a Government website which “does what it says on the tin”.
If you were a member of an Occupational Pension Scheme, for example if you worked for the NHS or the Local Authority, you will need to write to their pensions department.
Tip #2: Leave Final Salary pensions alone
You might be lucky enough to have been a member of a Final Salary (also known as Defined Benefit pension) in the past.
These schemes are now few and far between, with many closed down and replaced by alternative arrangements.
But, if you have this type of pension you should hang onto it for dear life. The income it will provide you with is guaranteed and may well be index linked when you retire.
It’s hardly ever a good idea to transfer away from a Final Salary pension and you should treat anyone who recommends you do so with a massive dose of scepticism.
Tip #3: Review your existing schemes
Broadly speaking there are four things which affect the amount of income your pension will provide when you retire:
- How much you pay in
- The charges which are deducted
- The performance of your pension pot
- Gilt yields and Annuity rates when you retire
As we’re dealing with old pensions point one doesn’t really apply and who knows where Annuity rates and Gilt yields will be when you retire; so let’s ignore those for now.
You need to focus on charges and performance.
Whether you do this yourself or you pay an IFA to do it for you, a review of the charges and performance needs to be undertaken. When it comes to charges it isn’t necessarily the case that cheap is good and expensive bad, you’re looking for value for money.
Charges can vary considerably from scheme to scheme, as can performance.
Unless you are experienced we’d recommend you invest in an IFA to do this for you, after all, despite how much dentists charge, would you give yourself a filling or root canal surgery?
Tip #4: One pension pot or multiple pots?
Final Salary schemes aside, which should be left where they are, you or your IFA will need to decide whether the charges / investment equation means you leave your pensions where they are, or transfer to an alternative.
The correct thing to do will vary by scheme and you may still end up with multiple pots; the convenience of one pension pot shouldn’t outweigh an effective pension.
We’d suggest this exercise is very difficult to successfully complete without experience or advice. Too many people who take the DIY approach simply focus on charges, gravitating to the lowest cost without considering performance, which can be a far greater factor when determining the final value of your pension pot.
Tip #5: Join your workplace pension
We’ve heard of people not joining their workplace pension worried they will have “yet another pension”.
Frankly, this is bonkers!
Not joining your workplace pension, whether it’s an existing scheme already being offered or it’s part of Automatic Enrolment, basically means you are throwing away free money, both from your employer and the taxman.
Very few people are paying enough into their pension, joining a workplace pension will give you a boost because your employer will contribute and you’ll get tax-relief.
Don’t worry about having “yet another pot”, sign up now and start saving for your retirement.
We can help
Unless you are an experienced DIY investor we would always recommend you use an IFA to review your existing pensions; it’s just too important to get wrong.
We guarantee it will be a lot less painful that a trip to the dentist!