Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
The case for making the big pension switch
Pensions are a bit like puppies; they’re for life, not just for Christmas. Since pensions auto-enrolment was introduced in 2012, almost everyone will hold a pension of some description for most of their life.
But pensions themselves come in different shapes and sizes, and many that were set up back in the 1990s and 2000s are now looking a bit like the mobile phones of that era – more than a little out of date. If your pension does resemble a Nokia 7700, it’s usually fairly straightforward to transfer it to a more modern model, but there are some pitfalls to be aware of.
IS YOUR PENSION A DINOSAUR?
Unlike a mobile phone, it might not be immediately apparent whether your pension is a dinosaur or not. There are a couple of key things to look out for when assessing if your pension is still fit for purpose.
First take a look at the performance of your pension fund. That can be easier said than done, as some providers are shy about broadcasting performance data. Perhaps this is because these plans are so old people have forgotten about them, or perhaps a less generous interpretation is that the numbers won’t exactly paint a positive picture.
Alongside performance consider the charges. In combination high charges and weak performance can be pretty devastating for your long-term wealth. Take stakeholder pensions, for example. When these were introduced by the government two decades ago, they were designed as a low cost pension option, carrying annual charges of a maximum of 1%.
That looks pretty steep by comparison with charges today, particularly when you consider that many of the funds available in these plans were simply index tracker funds in all but name. By simply following the index and charging up to 1%, serious long-term underperformance is guaranteed, and that ultimately means smaller pensions for savers when they come to retire.
GETTING COMPETITIVE ON COST
In this scenario, it’s worth considering switching to a competitive index tracker fund, which you could find for a charge of around 0.3% per annum including platform costs. Or alternatively, by switching to a properly actively managed fund, you at least give yourself a chance of outperformance and in many cases you won’t pay more than 1% in annual charges each year.
This brings us to another reason you might want to switch out of an existing pension scheme, particularly if it’s a bit long in the tooth. It may be that the fund selection available to you leaves something to be desired.
This can be particularly relevant if the fund you hold has been underperforming, or perhaps you need some better options to provide you with an income when you retire.
If you’re happy to choose your own investments, you might think about moving to a SIPP (self-invested personal pension), where a range of funds, investment trusts, ETFs and shares are available at low cost. By switching to a modern pension you’ll also be able to manage your pension online, or through a mobile app, which makes things a lot easier.
WATCH OUT FOR WARNING SIGNS
So what about the pitfalls? Well, a big red warning sign should be flashing if you have any kind of defined benefit pension, or final salary scheme. These guarantee you a certain level of income and they are immensely valuable, so it’s almost certainly best to stick with them, no matter how old they are. If there are some circumstances which mean you do wish to transfer out of a defined benefits scheme, this is an area which is best navigated with the help of a professional financial adviser, because it’s an irrevocable decision which can have far-reaching financial consequences.
Another snag to be aware of is transferring your current workplace pension to a provider of your choice. If you’re contributing to one of these, it will have to comply with modern regulations, which means it will at least have reasonable charges. But you may still think about transferring somewhere else, to open up a wider range of investment, for instance.
However you need to be careful that you don’t interfere with the employer contributions going into this scheme, as you definitely don’t want to miss out on those. In most cases it should be possible to transfer some of your pot while keeping employer contributions going into the scheme, but if you’re looking to do this, speak to your HR department first to find out how best to transfer without closing the plan down entirely.
THINK ABOUT YOUR PENSION AS AN INVESTMENT
It’s strange to think about how many times we’ve all traded up mobile phones in the last 20 years, and yet billions of pounds are still sat in pensions that were set up decades ago. Part of the issue is that often these schemes were set up by an old employer, and now the only record of them is sitting in a dusty filing cabinet in the attic.
Part of the problem is that many people think pensions aren’t really investments, but actually nothing could be further from the truth. Your private pension is probably the biggest investment you’ll ever own, and so it’s worth giving it a bit of TLC.