Consolidating your Pension Pots

Pensions have been in the news a great deal recently, particularly in relation to the new Pension freedoms and flexibility that allows people to access all of the money in their pensions from age 55, although with adverse tax implications in many cases.

This has meant more people approaching retirement are looking seriously at the best way to use the money they have accumulated in their pensions during their working lives.

It’s great to see people taking more interest in their retirement planning but as Jonathan Campbell points out it is a subject that needs to be investigated properly and thoroughly before any decisions are made.

“We were approached by a new client who had built up money in a number of different pensions while he was working. He didn’t really have a good idea of what they were or how they worked. His original plan was to look at drawdown and take money out on a flexible basis and he had read about the new rules and had a good idea of how this could be done

Initially we looked at what he needed the money in his pension to do for him when he retired. He had a fund value of around £600,000 and was looking for income in retirement of around £25,000 net of tax.”

Although the client’s initial enquiry was about the best way to pull all of his existing pensions into one and start to take an income from the new plan, Jonathan soon realised that there may be better options for him. “When we received all the information and small print from his pension providers it turned out that a number of his pensions had additional benefits, one of which was a guaranteed annuity rate which was pretty significant. It was attached to his biggest set of benefits and offered a guaranteed rate of almost 10%. He also had a number of Executive pensions with enhanced tax free cash and two or three smaller schemes with standard benefits. To ensure he received the maximum benefit from his pensions we had a long conversation around what he was looking to achieve and it seemed to me that the guaranteed annuity rate was important since it was going to provide an income of about £40,000 a year, which was much more than he was looking for.”

Guaranteed annuity rates apply to older style personal pensions and have to be studied closely as there are often conditions attached, as Jonathan explains. “He was stopping work at 60, and the guaranteed annuity only applied at either 60 or 65. It was going to be 10% at 60 and would have continued at this rate until 65 when it rose to 12%. This is much higher than could have been achieved on the open market and it was too high a rate not to take advantage of.”

It wasn’t all plain sailing however. When you purchase an annuity you are effectively ‘selling’ your pension fund to the insurer in return for a guaranteed income for the rest of your life. This income can be guaranteed for a specific number of years, and can be increased annually at a certain percentage. Both of these extras will impact the initial income paid by the insurer. Jonathan’s client was married and the provision for an income for his wife under the scheme wasn’t great if the client died and wouldn’t have been as flexible as it would have been if he had gone into drawdown. After much discussion with the client about what was important to him and his family Jonathan recommended setting in place life assurance that would pay out to his client’s wife if he passed away ensuring she would have capital to provide a continuing source of income once the pension payments stopped as Jonathan explains. “We discussed the best way to protect these benefits and we eventually took out a whole life policy to make sure there was money for his spouse if he died. We also looked at the pensions with the higher tax-free cash amounts available and took the lump sums as there was a bit of capital expenditure to be dealt with. We then consolidated the remaining pensions and the additional income from the guarantees paid for his whole life plan.”

A completely different solution from the one the client had in mind when he first talked to Jonathan and a great example of the need to take professional advice before deciding how to deal with the money that you have worked hard to build up in your pensions over many years. 

McCrea Financial Services is Authorised and Regulated by the Financial Conduct Authority. The value of pensions and the income derived from  them may go down as well as up. You may get back less than invested.