Two months to go until the end of this decade! Time speeds up as you get older. We’ve all heard that, and unfortunately some of us are experiencing it. To me, events seem to recede with astonishing rapidity into the past. I find it hard to believe that it’s fifteen years since the third and final series of Little Britain was broadcast. I remember going to see the stage show at the Bristol Hippodrome and crying with laughter. That was a couple of months ago, wasn’t it, or was it in 2006?
Anyway, I’m sure most people reading this will recall Vicky Pollard and her habit of starting her answers to questions with a string of contradictory utterances: ‘Yeah but no but yeah but no but yeah’ and so on.
I am sometimes reminded of Matt Lucas’s babbling Bristolian when I’m talking to employees in onsite 1:1s. Without doubt the most common question I’m asked is: Should transfer the value of old pensions into my current workplace scheme? I can’t advise people in these sessions; I can only provide information and guidance. But, boiled down, the answer is: Yeah but.
90% of the time, transferring is the best thing to do. The main reasons why this is the case are listed below. I should make it clear that I’m talking about transfers from one defined contribution (DC) policy to another. Transfers from defined benefit (DB) schemes — the sort that provide a guaranteed lifetime income in retirement — to DC schemes are a different kettle of fish entirely. This sort of transaction requires financial advice, supporting calculations, and a solid rationale before a transfer can be considered.
So, reasons why transferring is likely to make sense:
- Modern workplace schemes usually have much lower charges than old schemes — legacy schemes, as they’re usually called. The cost of default funds now is capped at 0.75%, and the actual charge paid by scheme members is typically much lower than this. One reason legacy products have high charges is that commission paid to the scheme adviser was built in. Commission is now banned. Another reason is that advisers liked to use model portfolios, so that members’ investments were spread across a range of selected mutual funds and managed on their behalf, with periodical rebalancing and switching carried out — for a fee, of course. Active management ceases when employment ends, but the fee, frequently around the 1% mark, continues being deducted and has a dramatic negative effect on growth.
- You may be invested in dog funds. Some actively managed funds that were riding high and were all the rage one or two or three decades ago may now be generating returns only fit for a poop scoop.
- Similarly, you may be investing at an unsuitable level of risk — too cautiously or too adventurously. Your workplace pension will accommodate your attitude to risk.
- As well as being less costly, modern default funds are designed to meet the requirements of the pension freedoms legislation passed in 2015. They incorporate ‘lifestyling’, so that risk is automatically reduced as retirement approaches. Moreover, different types of lifestyling are available to fulfil different objectives in retirement. Usually, legacy pensions either have basic lifestyling aimed solely at buying an annuity (which means that, for most people, excessive risk-reduction occurs) or don’t have lifestyling at all (which means that values can fluctuate unnervingly right up to the day people retire).
- Many legacy policies have been sold off to ‘closed book’ providers like Phoenix and ReAssure. It wouldn’t be controversial to say that their capabilities are very limited and their service is poor. Even if older policies remain with the original provider, they may have been superseded by more up-to- date products which get all the attention and funding. Underinvestment in outmoded products leads to shortcomings in governance and little effort being put into helping policyholders understand or administer their policies. Some providers are putting money into modernising their existing propositions; most are busy developing new ones. Workplace pensions today are digitised, offering hugely improved resources for scheme members, with a wealth of information, projection tools and transactional facilities available online, and clearer communication generally. Indeed, most modern policies can now be accessed via apps, as easily as bank accounts.
- And, as a very general rule, paid-up policies (ones into which no more contributions are being paid) aren’t as well looked after by providers as active policies. They’ve already got your money in a paid- up policy; they want more of your money in an active one.
- Some legacy pensions, dating mainly from the 80s and 90s, come with guarantees that would be lost if their value is transferred. They may offer a guaranteed annuity rate (GAR) that is far higher than current market rates. They may include more than 25% tax-free cash — sometimes a lot more. You may be investing in a with-profits fund with guaranteed reversionary (annual) bonuses, so that your pension savings grow by a set percentage every year. You would need to think very hard before forsaking guarantees like these, and some providers will insist that they will only accept a transfer if it is formally recommended by a financial adviser, which will cost you.
- Legacy policies may include an early exit charge, payable if their value is transferred. Exit charges are capped at 1% for over 55s but can be substantial, and a major deterrent, if you are younger.
Transferring nowadays is easy (usually)
Not so long ago, all pension transfers had to be advised, involved large quantities of paperwork, and could take weeks or even months. Now: welcome to self-serve! Scheme members can register online with their workplace provider, supply basic details of pensions they’d like to transfer, and most of the work is then done electronically. Your workplace provider may ask for a wet signature on a form, and we are still at the mercy of legacy pension providers’ processes, which can be cumbersome (especially for trust-based schemes), but nowadays it is commonplace for transfers to be accomplished in a matter of days.
When you are inputting pension details online you will be asked whether policies include guarantees. It is very important that you understand the terms and conditions that apply. Interpreting the reams of jargon- saturated text that policyholders used to be bombarded with may be beyond you, so a phone call to the provider of your legacy policy may be in order. These are the four key questions you need answers to:
- What charges am I paying?
- How am I invested?
- Does my policy contain any guarantees?
- Is there an early exit penalty?
Better still, ask HR for a 1:1 with your scheme adviser during the next site visit and get an expert to go through your paperwork with you.
We get asked all sorts of things by employees in 1:1s, but as noted pension transfers are top of the list. If you have a 1:1 scheduled, remember to bring your pension statements and other documents. Personally, I rather enjoy wading through the morass to locate the salient details (it’s an art, he added modestly), and then explaining the differences between the legacy policy and the workplace policy to the employee. Legacy policies are often costing people a lot of money, and it’s rare for them to decide not to transfer.
Yeah but: at EBC we tend to wear fairly informal attire for site visits — we believe that, usually, being dressed up to the nines can create a barrier to relaxed conversations in the modern workplace — but unfortunately our pink shell suits are invariably in the wash.