I am an office worker in my mid-30s and have built up a private pension pot after being auto-enrolled totalling roughly £75,000 over my decade long career.
I have been offered a new role, which I’m likely to accept, but one thing holding me back is the thought I will miss out on building that pot and the compounding interest on it.
I’m confused by my options. Can I move the money over to my new job and continue paying into it, or does it depend on who the provider is? If the new job has the same pension provider, is it easier, or does it make no difference?
Retirement planning: Can I move my private pension with me if I leave my job?
Does it matter if I simply start from scratch? I fear it does as a compound interest calculator, assuming 5 per cent growth, shows that if I continue paying in at the same level but on a £75,000 pot it will mean far more interest on my interest.
I wish there was a passport pension system in place that would make this dilemma much easier.
Tanya Jefferies, of This is Money, replies: This is a dilemma faced by many people who move jobs and eventually collect rather a lot of pension pots during their working lives.
The reason that pots are not automatically merged as you go along is there can be good reasons for and against ‘tidying up’ your pensions in one place.
You therefore have to make a decision on a case by case basis. We asked a workplace pension expert to run through what you should consider below.
Michael Ambery: The decision on whether to consolidate pensions is still an individual and personal one
Michael Ambery, partner at pension consultant Hymans Robertson, replies: Like most people you will have joined your old employer’s pension scheme or been enrolled automatically when you started your role.
Over your time there you will have built up a pension pot, and when you move job you can leave it where it is and keep it invested.
Your other option is to transfer the pot to another pension arrangement, most likely your new employer’s pension scheme, which you will want to start paying into as you start your new role.
What should you consider when deciding whether to move your old pot?
– Where is your current pension pot invested?
– How risky is the investment and does it suit your investment objectives and personal beliefs, such as sustainability and faith?
– What charges are you paying to have your money invested?
– Does the pot have any ‘penalties’ for transferring to another pension arrangement?
– Does the existing pension have any valuable guarantees attached to it, or a lower than usual age at which you could start to take your benefits, which you would lose if you moved it?
You should then compare the charges, penalties and investment choices at your old pension scheme with what is available at the one run by your new employer.
Regarding investment returns, if you leave your old pension pot where it is it will remain invested and is not dormant.
You asked whether it will be easier to move your pot if your new employer happens to use the same pension provider as the old one, or whether it will make no difference.
The answer is that although you may be with the same provider, your investment choices and charges and other factors (such as your date of retirement) may differ.
Therefore you should still consider the factors above in determining whether or not to move your pot and the impact to your retirement outcome.
What about compounding investment returns?
Help with financial advice and planning
When you are invested the pot grows by the amount of money that you and your employer pay in (contributions) and also the investment performance.
Year on year contributions and investment returns impact the size of the pot. For example if a pot increases by 10 per cent one year, the second year will benefit from an investment return again but on a larger pot – thus the impact is compounded.
The impact of compounding when in a positive direction results year on year in earning you more money over time. It’s a sort of exponential increase in the fund.
In situations where all else is equal, several smaller pension pots will compound at the same rate as one larger pot.
However smaller pots may face more erosion, in monetary terms, from fees depending on how they are charged. Smaller pots allow the benefits that diversification of investment risk can bring.
You ask does it matter if you already have a £75k pot and start a new pension from scratch now.
A £75k pot is a significant amount of pension savings. The decision on whether to consolidate is still an individual and personal one.
It is very important to make that decision with regard to attitude to investment risk, charges and how you intend to take benefits from the pension pot.
This risk and return from splitting pots rather than consolidating depends on how long an investor will spend looking at where and how funds are invested.
Behaviours suggest that people forget about the smaller pots and investment returns compounded may not be as good as that when focussed on a larger pot.
What about pension pot passports?
The idea of a pension pot following you as you move jobs is something that has been discussed for many years within the industry.
At the current time there isn’t an automatic process as it is a personal decision and people need to consider charges, investment choices, performance and risk first, as explained above.
There are several firms which act as pension ‘consolidators’, and will assist people on the journey to move benefits from one arrangement to another.
What else should you think about?
Here is some further advice to bear in mind.
– Keep up to date with your pension, in the same way you would your current account and bank balance. Check where it is invested and how it is performing on a regular basis (maybe a couple of times a year minimum).
Should you merge pension pots?
Managing only one might be easier… but you can lose valuable perks. Read a This is Money guide here.
– Don’t lose contact with your old pension providers, and keep your address details and beneficiaries up to date.
– Make sure you regularly check the charges that are being applied to your invested pot – the small details are important.
– Check the information available about your pension from the scheme trustee or provider. Most likely there will be a website or app which will contain information, guidance and tools to explain your options and help guide you regarding your attitude to investment, fund range, charges and considerations on taking or transferring benefits.
– When you are considering moving to another job, find out about the pension scheme, its benefits, and the level of contributions paid by your employer and required by you. Do a comparison of your new pension arrangement with your old one, as described above
– Be mindful of maximising the contributions and benefits from your employer, to ensure you are saving as much as you can.
– If you are in your 30s, you will want to put your pension in growth investments, such as stocks and shares. It would be typical for pension pots in invested in growth assets to target a 5 per cent plus annual return.
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