Pensions: You can't afford NOT to read this
PUBLISHED: 14:51 26 December 2017
If you’re not sure what money you’ve got, and where, Peter Sharkey has advice about what to do
Does there come a time when we stop making new year resolutions? When the fact that we failed miserably last year to maintain our new exercise regime beyond February, cut down on our alcohol intake, or start that novel, convince us that putting together a new list of targets is a waste of time?
Let’s hope not. That would be giving up. Instead, as we career towards 2018, this comparatively quiet period between Christmas and New year is a good moment to achieve small goals.
But what to do? There’s certainly no shortage of options: from “miracle” diets to surviving “dry January”. There’s also one other, fairly straight-forward, money-saving task that could be added to your list of 2018 targets. It’s unlikely to be accomplished overnight but, as will be the case once you get around to tackling that lonely-looking exercise bike, sticking with it is likely to pay handsome longer-term dividends.
Though it may involve rooting through old papers and searching in the loft for discarded employment records, it is a perfect project to spread over several weekends, saving you money in the process. What could be so important? Read on.
Research published by Prudential found that almost one in six workers lose track of old company pensions once they move jobs, while three quarters have no idea how much their contributions are worth. Bearing in mind this is real money we’re talking about, far too many people appear strangely unconcerned when it comes to leaving pension pots of different sizes scattered with various providers for years. In most cases until they retire.
Yet forgetting about (or, worse still, ignoring) a pension is not dissimilar to throwing money down the drain. Moreover, leaving it to languish in an under-performing or an unnecessarily expensive fund could dramatically affect your retirement income.
Consider the following example. Should a 35-year-old with a current £10,000 pension pot invest a further £3,000 a year until they’re 70 in a fund that achieves 4.5% annual investment growth, but charges 1.5% a year, the pot will be worth £214,966 in 35 years’ time. However, should our 35-year-old find a fund achieving the same 4.5% growth but which only levies a 1% annual charge, it will be worth £240,359 in 35 years: a saving of more than £25,000.
There are not many people who, when they realise how much they’re potentially letting slip through their fingers, are disinclined to do anything about it. Consolidating products and services is invariably a cost-effective alternative to paying “top dollar” for them individually. Transferring a variety of older pensions into a single pot will not only make it easier to track your investments, it will also provide a better idea of what income you could expect in retirement and result in lower charges.
A word of caution: consolidating pension pots is not necessarily for everyone. For instance, those in final salary or defined benefit (DB) pension schemes may be advised to leave their money where it is.
Income from DB plans is based on your earnings and the number of years you paid into a company scheme. It will ordinarily equate to your salary, either when you leave or retire from the scheme (final salary), or your average salary while you were a member (career average).
Transferring from a salary-based pension scheme means giving up often-valuable benefits in return for a cash value, which is then invested in another pension scheme. Nor is switching pension providers when you’re close to retirement recommended, primarily because of potential exit charges. It’s also possible that a forgotten pension comprises valuable benefits which you would sacrifice should you transfer. Accumulated death benefits or a guaranteed annuity rate (GAR) option can prove very valuable.
A GAR is a contractual obligation for an insurance company to guarantee (and pay) a specific investment rate which, in the case of pensions taken out before interest rates began their downward spiral around a dozen years ago, could be significantly higher than the rates available in the market when you retire.
Nonetheless, if you’re contemplating adding to your 2018 resolutions, investigating consolidating your pensions could prove the most valuable. Happy New Year.
The Week in Numbers
Heston Services, located close to Heathrow Airport on the M4 in west London, celebrates its 50th birthday in 2018, but we’re not sure it can expect many visits from well-wishers. The site was recently named ‘the worst in England’. And it has plenty of competition for that accolade.
Percentage of English GP practices with a patient list of more than 10,000. The proportion of surgeries with lists of this magnitude has risen by more than a quarter since 2013. For the record, an estimated 157 surgeries have patient lists exceeding 20,000.
Number of viewers who watched the Sherlock Christmas special on BBC1 last year. The top six programmes, in terms of audience numbers, were all on the BBC – only ITV’s Coronation Street, with 8.04million, attracted anywhere near Auntie’s festive audience. This year, either Call The Midwife (BBC) or Victoria (ITV) are expected to have attracted the largest Christmas audience.
Average increase in student debt by the time a graduate reaches 40, thanks to the introduction of interest rates on repayments set at 3% above inflation. They must be reduced because they undermine a ‘viable graduate repayment system’, says Lord Willetts. Yes, that’s the same David Willetts who, as universities minister, increased annual student fees to £9,000.
Cost of the ‘world’s most expensive home’, the Chateau Louis XIV, a 50,000 sq ft palace near Versailles, when it sold in 2015. It’s taken almost three years but, according to The New York Times, the buyer was Mohammed bin Salman, the Saudi crown prince
Peter Sharkey worked as an accountant on three continents and has been a company director and investor for more than 30 years, building and selling three different companies.