Consolidation and diversification will appeal to many investors, but be sure to weigh up the pros and cons
THE amount investors can save in a pension, which offers the benefit of tax relief, is subject to annual and lifetime allowances – currently £50,000 and £1.5m respectively (though due to fall to £40,000 and £1.25m in 2014/2015). This makes pensions the most tax-efficient way to save for retirement – an issue that has never been more pertinent, with investors spooked by volatile market conditions and ongoing financial challenges. In response, many are looking past traditional pension schemes to adopt retirement plans of their own.
Age UK recently released research that found 23 per cent of UK adults have lost track of at least one of their pensions and have problems then tracing them. The root of the problem lies in changing long-term trends in the employment market, and increased confusion surrounding retirement planning. These concerns have led many investors to consider whether consolidating their pensions is the best course of action. If you’re keen to boost your pension’s performance, it may be worth joining them.
MOVERS AND SHAKERS
The primary reason for moving a pension is to get improved investment performance and lower charges – giving you a higher retirement income. But having your pensions in many different pots can make it hard to make the right investment choices, which could result in poorer returns. “If your retirement funds are scattered around, you are in a weaker position to manage them as an overall fund,” warns Jason Hollands of BestInvest.
Consolidating your pension will bring a number of benefits, including cutting down on admin – which makes it far easier to monitor and manage your investments. As such, every time you change jobs, it is worth looking at whether you should be rolling together any preserved pensions from past employment. And “any time you review your pensions, ask yourself whether you could reduce the number of arrangements,” suggests Tom McPhail of Hargreaves Lansdown. Bringing together smaller funds can reduce charges: Which? lists Prudential, Scottish Life, Standard Life and Zurich among those offering lower fees for investors with bigger pots.
Those who opt to consolidate their pensions will do so through a self-invested personal pension (Sipp), the government-approved pension scheme that allows investors to make individual choices about how their pension is managed. Bringing your existing pots together in a Sipp may reduce fees and give you access to better performance. It all sounds like good news, but there are pitfalls to be avoided.
PROCEED WITH CAUTION
Investors should avoid being too hasty. There are penalties, or loss of benefits and features, that could be incurred from transferring a pension. And bringing pensions under one roof isn’t the right course of action for everyone – if you have a final-salary pension scheme, for example, it may come with benefits that other Sipps won’t offer. Similarily, some policies offer life insurance, or a guaranteed annuity rate, that you would lose out on by deciding to transfer.
And Which? warns that some providers choose their with-profits fund as the default option, meaning that, if you switch to another provider, you could be hit with a market value reduction (MVR). “Prudential and Scottish Widows, for example, currently impose an MVR on some products.”
But the biggest risk lies in exit penalties from your existing pension provider. As such, it may be worth seeking advice before taking action, even if you think you’ve found a better-performing fund. And make sure you consider all outcomes when doing your calculations: if you’re close to retirement, you may not have time to regain your losses from switching.
A recent Hearthstone Investments report found that the Sipp market has grown at a rate of 35 per cent year-on-year since 2006, with 200,000 new Sipps opened annually. Their benefits are several: they give investors the opportunity to both consolidate and diversify their pension assets at the same time. They give better control over what your money is invested in, and investors will benefit from increased transparency. They offer a range of investment options – you can invest almost anywhere.
First introduced in 1991, Sipps were initially aimed at the more wealthy, sophisticated investor. But the market has evolved considerably with the advent of low-cost, flexible Sipps. Investors will need to be wary of high fees, however – some investments have been known to carry initial charges of up to 5 per cent of managed funds. The flat fee structure offered by many Sipps – often around £500 per annum – is beneficial for investors with a larger pot.
But competition has driven down costs, and led many providers to waive these fees to attract new business. What’s more, “it is now possible to opt for a managed portfolio service or simply to invest through a multi-manager fund, both of which can provide a spread of investment across markets and asset classes – meaning they are no longer exclusively for those with money and knowledge,” says Hollands.
But a key advantage for the more sophisticated investor – who may hold a full Sipp rather than the more popular, low-cost option – is the ability to hold commercial property within the Sipp. “A group of dentists or doctors, for example, could hold their surgery in a Sipp,” says Daniel Aitkenhead of Killik, which offers commercial property to investors holding its Executive Sipp. For those investors, any income, which normally comes from the rent, is paid to the Trustees. They in turn will use it to pay the interest on any mortgage and to repay capital. Over a period of time, the loan (if there is one) can be repaid and then the commercial property can either be sold or used to generate an income for you through a drawdown plan.
COUNTING THE COSTS
Management charges for stakeholder schemes are capped at 1.5 per cent for the first ten years, and reduced to 1 per cent thereafter, making them a tempting, low-cost option. Sipps, meanwhile, have many one-off charges and fees can add up, eating into your investment gains. And low-cost Sipps rarely offer competitive cash options, with interest rates on Sipp cash typically close to zero.
As with any investment, the potential for gains increases with your risk appetite. But so does the potential for loss. Investors should be cautious, do their research, and review their Sipp annually to ensure it is performing to your goals.