OPINION: A potentially profitable Bank Holiday plan
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More than two decades ago, following a horrendous drive which took almost three times longer than normal, my wife and I vowed never to go away over a Bank Holiday weekend again. Having taken this decision, the sense of relief was immediate and we’ve since continued to feel smug when watching TV news reports of 10-mile (or longer) Bank Holiday traffic queues, congratulating ourselves on making such a smart move by staying put.
There’s a bumper Bank Holiday on the horizon, kicking off on Thursday, June 2, although you won’t find me embarking on any lengthy motorway journeys designed to raise the blood pressure to perilous levels.
It may take some time to finalise and involve rooting through old papers, or perhaps jumping into the loft to search for earlier employment records, but here's an idea that could be the perfect project to complete during an extended Bank Holiday that is likely to save you lots of money.
It’s estimated that almost one in six workers lose track of an old company pension once they move jobs and 76pc have no idea how much their contributions are worth. Far too many folks appear unconcerned when it comes to leaving pension pots of varying sizes scattered with various providers until they retire. Yet forgetting about (or worse still, ignoring) a pension is not dissimilar to throwing money down the drain, while should you leave it languishing in an under-performing or unnecessarily expensive fund, your retirement income could be dramatically affected.
For instance, should a 35-year-old with a £10,000 pension pot invest a further £3,000 a year until they’re 70 in a fund that achieves 4.5pc annual investment growth, but charges 1.5pc a year, the pot will be worth £214,966 in 35 years. However, should our 35-year-old find a fund achieving the same 4.5pc growth but which only levies a 1pc annual charge, it will be worth £269,255 in 35 years, an extra £54,000.
Consolidating products and services is almost always a cost-effective and convenient option. Many people find that when they buy their cable television and broadband or gas and electricity packages from one provider, the savings are immediately evident. The same is true of pensions. Transferring a variety of older pensions into a single pot will not only make it easier to keep an eye on how your investments are performing, but it will also give you a better idea of what income you could expect in retirement while resulting in lower charges.
Self-invested personal pensions (SIPPs) have become enormously popular in recent years because they provide savers with access to a wide variety of investment funds at very low rates. Not long ago, SIPPs were the preserve of the ultra-wealthy, but as technology has dramatically reduced provider costs, they’ve become the pension platform of choice for many independent investors. However, it’s worth noting that consolidating pension pots is not necessarily for everyone.
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For example, people 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 upon 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).
In other words, transferring from a salary-based pension scheme means giving up often valuable benefits in return for a cash value, which is invested in another pension scheme.
Switching pension providers when you’re close to retirement is rarely recommended, often because potential exit charges and the short time frame involved do not offer the investor an opportunity to benefit from a transfer.
Furthermore, it’s possible that one or more forgotten or ignored pensions comprise valuable benefits which you would sacrifice should you transfer your money out of it. Accumulated death benefits or a guaranteed annuity rate (GAR) option can prove extremely valuable depending upon when you started contributing to a pension.
A GAR is a contractual obligation for an insurance company to guarantee a specific investment rate which, in the case of pensions taken out before interest rates began their downward spiral around 16 years ago, could be significantly higher than the rates available in the market when you retire – like now, for instance.
Many financial advisers find that lots of people take the opportunity afforded them during Bank Holidays to review or unearth what can often be half a dozen or more old pensions. As a potentially profitable alternative to being stuck for hours in a motorway traffic jam, spending time locating your old pensions takes some beating.
For more financial advice, check out Peter Sharkey’s regular blog, The Week In Numbers.