It doesn’t matter the size of your pension pot, it’s important to review your personal pensions on a regular basis, to ensure everything is still on track to meet your objectives at retirement.
For most people, their personal pension is one of the biggest financial investments of their lifetime, second perhaps only to their investment in the family home. The contributions made to a pension over a lifetime can accumulate into a significant pension pot, which can help provide a pension income at retirement. Unlike a family home, however, where most people will undertake regular maintenance to ensure their home remains in good order, many people pay little attention to the progress of their pension plans as they go through their working life. The result is that underperforming pension funds could be left in place for an extended period of time, or excessive charges are allowed to eat away at the value of the pension.
We often come across clients who have held pension arrangements for 20 years or more, and it is important to recognise the significant changes that have occurred in the pension industry over this period. Pensions have become more sophisticated, more transparent, and far more competitively priced, and the most appropriate solution available on the market decades ago may well lack the features and efficiency of modern pension contracts.
The range of investment options available within a pension has increased dramatically in the last couple of decades. Most modern pension contracts offer a wide range of fund options, providing the scope to tailor an investment portfolio to your precise requirements. For example, this includes the ability to adapt a portfolio to meet ethical considerations, if preferred.
How you choose to take your pension benefits has also evolved, with the pension freedom rules introduced in 2015 now giving far more flexibility and greater choice. Many older pension contracts have a very limited menu of options open when taking benefits, whereas the new pension freedoms allow Tax Free Cash to be drawn as best suits the individual, and provide the ability to draw pension income flexibly to meet exact income requirements. This can also provide greater tax-efficiency and allow pension plans to adapt to a change in circumstances over time.
Many older style pension contracts carry management fees that are expensive when compared to more modern pension plans that are available. These additional fees can mount up over the years a pension is in place and eat into potential returns.
The performance of pension funds in older style contracts may also not be up to scratch when compared to the performance of other funds with similar levels of risk, invested in a similar asset allocation. Insured funds, which formed the basis of many older pension contracts, often produce a poor performance when compared to actively managed modern investment funds, or look expensive when you consider the low-cost passive funds that are now available.
Whilst newer style pension plans are more competitively priced, pension providers have little incentive to lower the fees on older, uncompetitive pensions. They rely on the inertia from their customers, who don’t seek a better deal elsewhere. Holding an older pension contract over your working life could have a negative impact on the value of pension savings over time, and as a result, lead to a lower income when retired.
When we consider existing pension contracts, we can often identify cost savings, better performing funds and greater flexibility in how pension benefits are drawn at retirement, as being potential reasons why it may be appropriate to consider moving the pension to another provider.
There are, however, reasons why it may be best to leave a pension arrangement in place and firmly underlines the importance of seeking impartial advice on existing pensions before taking action. Expert advice is particularly important when dealing with older pensions, which often come with lots of potential traps you could inadvertently fall into. We can do the work by analysing your pension carefully, to make sure you aren’t hit with costly exit penalties, or where transferring means you risk losing valuable benefits that would be lost on transfer, such as a guaranteed annuity rate. We can help to determine whether it is worth merging some or all of your older pension pots, and to find the right pension to suit your retirement plans and goals.
Arranging a check-up on your existing pensions can be a sound investment. At MGFP, we take the time to understand your existing pension arrangements, and can undertake comprehensive analysis of the performance of existing pension funds, together with a cost comparison against other pension contracts available. We also take the time to get “under the bonnet” to check carefully to see whether the existing pension has any special features, such as guaranteed annuity rates or exit penalties, which could affect our advice. As an independent Chartered firm, we can access competitive modern pension contracts from across the market place to find the most appropriate solution for your needs.
Contact one of our experienced financial planners at MGFP to arrange a review of your existing pension arrangements.
