Neil Hugh, Head of Customer and Workplace Strategy, discusses the benefits of having all pension savings in the one pot.
Auto-enrolment means more people are saving for retirement than ever before. And with workers averaging 11 jobs during their working lives, it’s easy to lose track of pensions built up with previous employers. Employees consolidating pensions into one single pot may avoid these problems and gain from other benefits too.
Why should your employees think about consolidating?
Getting your gas and electricity from one provider, as well as combining your TV, phone and broadband packages, is now commonplace. It makes things easier to keep tabs on and generally cheaper too. So why not pensions too?
For many employees, having one pension pot and correspondence to manage is benefit enough to consolidate. But let’s look at some of the other benefits it could bring employees:
- Having fewer pensions could lower how much they pay overall in charges
- They could benefit from a more modern range of investment options that may give them better outcomes
- Having one pot, one total could make it easier for employees to monitor progress against their retirement goals, and to use pension forecasting and modelling tools more accurately
- It can help higher earning employees keep within their personal tax allowances
- It can make it easier to pass on wealth to loved ones
What should your employees be aware of?
Consolidating isn’t a one size fits all – it may not be right for everyone. So employees may want to get professional advice if they’re thinking of consolidating their pensions into one pot, and they should be aware that there may be a cost for this advice.
They also need to understand that some valuable benefits and guarantees could be lost by transferring and some of the benefits we’ve listed above, such as passing on wealth, may involve transferring a defined benefit pension into a defined contribution plan. This needs special caution, and generally employees must get financial advice before they can go ahead with a transfer out of a defined benefit pension. There’s also no guarantee of a better pension as a result of consolidating.
When is the right time to talk about consolidation?
The message works best when it’s targeted at the most appropriate time.
And there’s no better time to talk about consolidation than when a new employee starts. They’re enthusiastic and positive about their new job and benefits, so are potentially more engaged.
Consolidation messages may also resonate well with employees in their 30s, when their careers are established and they probably have more than one pension pot. Landmark events, such as getting married or having children, are other times when employees tend to review their finances, so may be open to consolidation messages.
In the case of older employees, consolidation messaging should highlight the importance of investing their pension savings in a way that’s aligned to how they plan to take their money. For example, some employees may have some of their pension savings invested in an option that targets buying an annuity. If, like many people, they want to take advantage of the flexibility that pension freedoms have given them, they may be taking more risk than they should by keeping their money there as they get closer to retirement.
Here’s some of the support we can provide on consolidation:
1 Statistics sourced from the Pension Tracing Service website, 23 March 2018.