In our weekly series, readers can email in with any question about their finances to be answered by our expert, Charlotte Ransom. Charlotte has 30 years’ experience working in financial services and wealth planning, including 10 years as a partner at Goldman Sachs. She co-founded Netwealth, which specialises in low-cost investing and financial planning advice. If you have a question for her, email us at money@inews.co.uk.
Question: I recently assessed all my pensions and now want to put my five different pots from various jobs into one place. I’m unsure how best to consolidate and manage my £67,000 combined savings and worry I won’t have enough with only £200 extra a month to save. What can I do in the 14 years before I retire to make my pension work harder?
Answer: Consolidating various pension pots is often a good idea and it’s a very positive sign that you made the leap to assess your circumstances. Many can be deterred by the potential of the frustrating legwork involved, but making the switch can have a substantial impact on your financial outcome.
You seem to have done much of the heavy lifting already in terms of locating your pensions. For the benefit of other readers, a great resource is the government-backed Pension Tracing Service. Once you have tracked down your pensions, the next step is to decide on the most appropriate way to manage your combined pensions from now on.
When assessing a manager for your newly consolidated pensions, you should explore how a firm can help you to achieve your goals. You will likely benefit in the first instance from having a single place to monitor your pension assets. Some firms can now provide excellent tools to help you track your investments. Technology has made life much easier for those who want better visibility and more control over their assets, so there is no reason to stick with an outdated provider that can’t meet the needs of modern investors.
A single combined pension pot also enables you to manage your costs more efficiently. For those with older pension schemes, charges may well have been high for a long period and historically there has been far less scrutiny over fees, nor a real understanding as to the effect high fees will have on the final retirement pot. It’s also likely that the underlying investment approach was based on active fund management, contributing to higher overall fees.
The evidence these days largely favours a passive approach to long-term investing, where professional managers focus on achieving the right mix of investments through Index or ‘Passive’ funds. These track the performance of indices such as the UK’s FTSE 100 and the S&P 500 in the US, rather than trying to craft a bespoke portfolio from a selection of individual stock picks. The reason passive investing has gained so much in popularity is twofold: the approach has tended to outperform an active approach over the medium to long term, and it is cheaper.
Being cost effective makes a huge difference. I refer to fees frequently in this column because unnecessarily high fees are the single biggest detractor from final retirement pots, and we can avoid them. From my perspective, focusing on keeping charges low is supremely important. Customers are often tens of thousands of pounds better off by saving on unnecessary charges, allowing them to meet their true objective of growing their investments by as much as possible so they can achieve their own goals and those of their families.
Choosing a new provider also gives you the chance to assess whether you have been taking an appropriate amount of investment risk. You may find that you have been quite cautious until now, but since you have 14 years until retirement and then a long period of retirement itself, you should consider whether you need to make your money work harder. Typically, taking more investment risk gives you the potential for higher returns, and if you have time on your side, you can sit through any periods of market volatility without having to worry about needing to draw on your funds.
You also have the opportunity to make sure you are appropriately diversified. A suitable blend of asset classes (such as stocks and bonds) across different regions can give you access to a mixture of investment growth potential and help to protect you from periods when certain assets are going through a rough patch.
These are some of the key considerations when choosing a provider for your consolidated pension pots – your next step is to instruct your manager to consolidate them for you. How long this takes can vary but the good news is that, since the pandemic in 2020, there is a wider acceptance of technology which has generally made the transfer process easier and quicker. You have also helped speed up the process – from months to weeks – by having all your various scheme details to hand.
With the addition of your £200 in contributions a month, how much you can generate from your pension will greatly depend on the factors above: total annual charges, making sure your investments are diversified and sufficiently risk-weighted and having enough time to allow your pot to grow. If you are a lower rate taxpayer, your contributions will be boosted by the government to £3,000 a year (more if you pay a higher rate), and if we assume a yearly return of 5 per cent, your initial pension pot of £67,000 could grow to over £190,000 by the time you retire in 14 years.
Consolidating separate pensions into one pot makes sense for most people. There will be cases where it may not be worth your while; for example, if you have contributed to a defined benefit (or Final Salary) scheme. However, many people will benefit from evaluating their circumstances, particularly those who do not have a Final Salary pension. It’s also worth remembering that you can access one-off financial advice if your situation is complex, or if you need help in assessing whether you should consolidate some pots and not others.
Many of us have accumulated numerous pension pots from a lifetime of working. Taking the time to locate them and to see whether they are fit for purpose – could they be working harder, for less cost? – will almost always reap benefits. You have taken the important first step, and by assessing your circumstances and taking appropriate action, you will most likely be in a much better position when you retire than you might have anticipated.
