Few people nowadays stay in one or two jobs for their life until they retire. The result is that many people end up with lots of little pension pots all over the shop. Combining these into one or two pension funds could make a lot of sense.

Moving your Pension

The first, and most obvious reason, for moving your pension is to take advantage of better investment performance and lower charges, both of which will give you a higher retirement pot. However, it’s not always that simple – some funds have hefty exit charges associated with them, or the fund you want to move to may have higher fees. Particularly if you are close to retirement age, it is important to take a look at all the costs associated with moving your pension to ensure that the limited time the funds will be in the better performing fund will be worth it when fees are taken into account.

Your Portfolio

It is important for you to work out what pensions you have, what type they are and where they are held. You might have several types of pension – one of the better types to have is the final-salary pension scheme which will pay you a pension based on the salary you had when you left your job. If you have this sort of scheme, it is normally advisable to keep the pension and don’t move it unless you are changing to another job which also offers a final-salary scheme with benefits that equal or outweigh the old pension. If you are in the position to transfer your pension across, check whether your new employer will allow past contributions to the old pension to be moved across into the new pension.

If you have other pensions, it may be worth consolidating them into one. Most of these kinds of pensions rely on contributions and investment growth to help build the pot up. When you retire, the funds in the pot can then be used to purchase an annuity which pays an annual income. These schemes are riskier than the final-salary schemes because they rely on the stock market – if the stock market falls, so too will your pension pot.

By combining your pensions, you may benefit from lower charges and the pensions which are not performing well may get a boost to their performance. By only having one or two pensions, it will also help you monitor the progress of your pension funds more easily.

Obviously, putting your pension money into a scheme with higher growth rates means you will have either a higher income when you do retire, or it will allow you to retire earlier than planned.

Charges

As mentioned above, if you are close to retirement, you need to carefully calculate whether switching pensions will leave you with more money after exit fees are taken into account. Some old-style pensions taken out in the 80s/90s have hefty exit penalties of up to 20%. Your contract should state how much exit penalties are, if any. If you are in any doubt, ring your pensions provider and they should be able to advise you.

Normally, if your pension policy was taken out after 2001 there won’t be any exit penalties to pay although if your pension is invested in a with-profits fund, there may be a withdrawal penalty. Withdrawal penalties differ from lender to lender with many having very low or no penalties, however some providers have fees of up to 40% if the fund is taken before you are 60.

If you pension does have high fees, it doesn’t mean you shouldn’t move it. Some funds may have poor growth due to little of the money being invested in shares. In the long run, it may be worth taking the fee hit and moving the pension to one which has better investment performance, particularly if there are still a number of years to go until you retire.

Choosing a Pension

If you are consolidating your pensions, now is a good time to look at what sort of pensions you have in front of you and what pension you want to use. Take a look at the management fees associated with the fun, whether there are initial charges on the money your transfer in, and what the past performance of the investment fund is. If you feel you could be doing better, now is a great time to shop around for a better deal.

Most pension providers will charge an annual management fee, normally a percentage of your funds. If you are averse to risk, look for stakeholder products. You can also choose your own investment funds by using a self invested personal pension (Sipp). Some Sipps have set-up costs, others don’t. The costs associated with Sipps vary according to how often you use the investment facility. If you choose a Sipp, ensure that you are not paying higher charges for the company’s own funds – you may be able hold the same funds but with lower charges if you use the same company’s standard pension product.

Advice

A good independent financial adviser (IFA) will be able to help you out with your choices. Click here for our guide to IFAs.

If you have a small pension fund which only has a couple of thousand pounds in it, the cost of an IFA may outweigh the benefits of moving your fund. IFAs can either be paid with a fee by the customers, or they can get commission from the products the customer takes out at no cost to the customer. It can sometimes be better to pay a fee for the IFAs advice than going with commission, depending on the situation.

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