I have often been asked by clients whether it is best to retain a workplace pension/s or transfer it into their own Self Invested Personal Pension (SIPP).  This is a particularly pertinent question when they have a number of workplace pensions from previous jobs.  They are often curious whether or not they should consolidate their pensions into one or leave them where they are.  The answer isn’t always straightforward because it depends on a number of factors, and it is very much tailored to each individual.  In other words, every case needs tailored advice.

 

Just to be clear when talking about workplace pensions, I mean money purchase (defined contribution) pensions not final salary (defined benefit) pensions.  In other words, pensions that typically invest in one or more funds and where the valuation fluctuates each year.  The return you get is based on how much you and your employer contribute to your scheme and how well it performs over the years.  There is no guaranteed pension based on the number of years’ service and your final year’s salary before retirement.  So you do not get a guaranteed pension.  In the private sector the vast majority of workplace pensions are like this.  Pretty much only in the public sector have final salary pensions survived because, quite frankly, virtually all of them are unfunded and guaranteed by the government, in other words the taxpayer.

 

Also, whilst you are working for an employer, I am not necessarily advocating transferring your workplace pension into a SIPP even though most employers workplace pension schemes do allow partial transfers into a SIPP of your choice and allow you to remain a member of their scheme which means you continue to receive employer pension contributions.  You definitely should remain a member of your workplace pension scheme even if you make a partial transfer into a SIPP.  For some people a partial transfer and remaining a member of the scheme is a good choice, but it is not for everyone.  Anyhow that is not the main purpose of this blog which is focused more on what you should do with one or more preserved workplace pensions from previous employers.

 

 

So what are the advantages of workplace pensions?   

  • Low charges
  • Usually, a large household name pensions provider such as Aviva, Royal London, Aegon or Legal & General
  • A default managed pension fund
  • Automated risk reduction strategies for the 5 years before your intended retirement age

 

Of all of these advantages the only one of any note is the low charges.  The other three advantages could equally be described as disadvantages.

 

 

So what are the disadvantages of workplace pensions?

  • No advice on selection of funds
  • No advice on asset allocation (diversification of risk)
  • No advice based on your attitude to investment risk
  • No advice on death benefit nomination
  • No advice on your complex and diverse retirement options e.g. Income Drawdown vs annuity purchase
  • No advice on when or how to take your pension benefits
  • Potentially no Income Drawdown option
  • No taxation advice on tax-efficient withdrawals for Income Drawdown, if appropriate
  • No advice on salary sacrifice
  • No advice on reducing the impact of the Lifetime Allowance on the tax-free cash lump sum and death benefits
  • No advice on the Annual Allowance
  • No advice on the potential benefits of a partial transfer into a SIPP
  • No advice on the potential benefits of consolidating your pensions into one
  • No cash flow planning advice to ensure you are on track to meet your retirement goals
  • No annual reviews
  • No due diligence or advice on the suitability or financial strength of your workplace pension provider
  • Potential failure of the workplace pension provider which is what happened with Equitable Life where many policy holders lost significant amounts of money
  • Lack of diversification if invested in just one fund with just one compensation limit of £85,000
  • No advice on the default managed pension fund, if applicable
  • No advice on the suitability of the automated risk reduction strategy, if applicable
  • Potentially better and more suitable, tailored investment performance from a SIPP
  • No advice on legislative changes to pensions
  • No self-investment options such as commercial property purchase or share purchases  (equities)
  • Access to fewer funds than available on a wrap platform
  • No personalised advice whatsoever based on your personal circumstances and life changes (and there will definitely be changes in your life no matter how large or small)

 

As you can see there are substantially more potential advantages in transferring your workplace pension into a SIPP and taking advice from an Independent Financial Adviser (IFA). Far more advantages than retaining your existing workplace pension in my opinion.

 

 

So what should you do if you have one or more workplace pensions?

If you have the time, inclination and skill, you could manage your own workplace pension or you could transfer it into a SIPP yourself and manage it.  If you use a reputable platform such as Hargreaves Lansdown, AJ Bell or Interactive Investor you will keep the charges low and potentially as low as your workplace pension’s charges.  However, do you really think you have the comprehensive knowledge you need to manage it yourself and maximise its benefits?

Alternatively, you could seek advice from a pensions specialist IFA who should ideally be a Chartered or Certified Financial Planner or better still both.

You may decide to keep your workplace pension/s but, if you do so, make sure it is a considered decision and not because of indifference or apathy.  You know it makes sense.* 

 

*RISK WARNING

The value of investments can fall as well as rise. You may not get back what you invest. The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction. All information is based on our current understanding of taxation, legislation, regulations and case law in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. The Financial Conduct Authority does not regulate tax planning, estate planning, or trusts.  This blog is based on my own observations and opinions.

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