Many older corporate and personal pension plans offer incredibly valuable retirement benefits, such as a lifetime guaranteed income of up to 12% per year. Still, policyholders can lose them permanently when switching or consolidating pots, experts warn.
Pension providers and platforms are encouraging savers to change their existing defined contribution and personal pension plans, saying it will reduce burdens and make them easier to manage.
Pension consolidation works well for some, but it can be a huge financial mistake for others, who can sacrifice generous “guaranteed benefits” that are not available on current plans.
Many don’t even realize they have these benefits, because they’re buried in the fine print of a plan they signed decades ago.
Yet these may be lavish by today’s standards, as they were offered in the 1980s and 1990s, when investment growth and interest rates were much higher.
Pensions expert Stuart Feast, president of Zippen, which offers low-cost ‘simplified advice’ on transfers and transfers, warns of costly mistakes that could wreck your retirement plans.
Consolidating your various pensions into one pot can make sense, he said. “Having everything in one place is easy and convenient, but it can also lead to extremely poor results.”
Many older retirement plans have something called a guaranteed annuity rate, or GAR, which pays out an incredibly generous retirement income by today’s standards, Feast said. “This type of pension was commonplace in the 1990s and incomes ranged from 9% to 12% per year.”
This is very attractive today, as it could offer someone with a £100,000 pension a lifetime guaranteed income of £12,000 a year, with a link to inflation.
By contrast, a 65-year-old man buying an inflation-linked annuity for £100,000 would get a starting income of around £3,400 a year.
This would give them £8,600 less income in the first year, and the losses could add up over time.
Many older programs may include bonus funds with profit, which can be worth tens of thousands of pounds and will also be lost upon transfer, Feast said. “Some company plans provide benefits for death in service, which will also disappear if consolidated with a new provider.”
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Other guaranteed benefits could include a fixed retirement age or extra tax-free cash on top of the standard 25% everyone receives.
There’s another pitfall to watch out for, Feast added. While many pension consolidation companies lure customers by promising low fees, in some cases they can be higher.
This is especially important for those with bigger pots, Feast said. “Someone transferring, say, a £100,000 pension with an annual management charge of 0.2% to a scheme charging 0.7% would pay £500 in additional charges in the first year alone.”
High fees increase over time – if this pension grew at an average rate of 6% per year, after 15 years the cheapest pension would be worth £232,962, which is £15,979 more than the most expensive .
Feast said the big problem is that many run-only pension consolidation services don’t offer adequate advice on the dangers. “The pension provider takes your money but takes no responsibility as to whether the transfer was a good idea or not.”
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Consolidating pensions sounds simple and sensible, but be careful, said Stephen Lowe, group communications director at pension specialist Just Group.
It is mandatory to take regulated financial advice when transferring a defined benefit final salary pension worth more than £30,000, or defined contribution pensions with guaranteed benefits above this sum.
Always speak with a regulated financial adviser before leaving a plan that offers GAR, Lowe said. “Otherwise, you could lose tens of thousands of pounds over your lifetime.”
Romi Savova, managing director of PensionBee, said the consolidation had great benefits. “Combining your different pensions makes it easier to check if you’re on track for the lifestyle you want in retirement and makes fees more transparent.”
She cautioned: “Beware of exit fees on your existing plan, if they are too high they could wipe out the benefits of switching.”
Savova suggested booking a free orientation session with the government-funded Pension Wise service, if you’re 50 or older.
The protected benefits of old pension plans are extremely generous compared to today’s simplified plans. Lose them at your own risk.