Most pension funds are linked to the performance of stock markets. Unfortunately these went into free-fall during the recession and have continued to decline since. Experts predict that the situation is going to get far worse still before it gets better.
If your return rates have suffered and you don't think you'll now be left with as much as you thought you would in retirement, you may be thinking that it's time to switch things about and try to find yourself something better. In some cases, it's true, your money might not be in the best place and there might be things you can do to increase your lot.
Often, though, even if the returns on your current fund have dwindled, you stand to lose a lot more by switching. The money surrender charges that you incur by taking your money out of your existing arrangement, the fees you'll have to pay an adviser and the costs of setting up the new scheme can render the exercise counter productive. The costs vary, but usually amount to somewhere in the region of five per cent of the total value of the fund.
Some advisers charge up front fees for their initial evaluation services while others charge commission based on the final deal. Either way, it's a cost that you should probably swallow. Pensions can be extremely complicated to understand – the advice of an independent financial adviser (IFA) who has a proven track record in dealing in pensions and is accredited by the Financial Services Authority is critical. Ensure that you satisfy yourself that the adviser you choose is going to give you all of the options that are available to you, rather than just the ones that they stand to profit through.
Switching your personal pension
Generally, IFAs don't recommend moving your money from one personal pension to another if you have ten years or less before you plan to retire and start drawing on it or if it has less than around £10,000 in the pot. This is because the new fund is unlikely to have time to make up for and surpass the benefits that you'll lose through the switch.
However, if these criteria do not apply to you, you might be able to benefit from leaving behind a flailing pension fund and finding something new. When weighing up whether or not it's worth it, you'll have to have a transfer value analysis carried out by an IFA. This gives you a an idea of how much the new pension fund will have to grow by each year to make the switch worthwhile. As a general rule of thumb, this figure has to sit at around eight per cent or less to give the switch a chance to work out profitably.
One of the biggest justifications for a switch might be the annual administration costs you are paying. These differ wildly, from under one per cent to over and above 10 per cent, from provider to provider. Make sure this forms a key part of your considerations.
Switching from a workplace pension scheme
Taking your money out of a workplace pension fund and putting it into a personal one is extremely risking business and is rarely advised in anything but a few scenarios, or to those absolutely comfortable with risk and its maximum potential implications. This is because with a personal pension scheme the risk associated with an investment that under performs sits with the individual taking out the scheme. With workplace schemes, the risk sits with the employer.
It is almost always inadvisable to switch your workplace pension scheme to a private pension if your employer is paying into it as well as yourself. The returns that you would get with the private option will rarely if ever amount to more than they would with your employer's contributions on top of the market increases.
A transfer from a workplace scheme will probably only ever be fruitful if you have left the company and hence the employer is no longer making contributions. Even then, though, you are under no obligations to move your funds just because you have left the company. It could be that that the pension scheme you're in still has a decent return, just based on your payments and the investment gains, compared with what you could get from the private option. And, crucially, it won't be subject to risks, as it would be if you switched.
If you do decide to move the pension, you'll have to carry out the same transfer value and risk analysis as described earlier with an IFS. In this case, though, the transfer value analysis could take up to three months to complete.
Getting the right set-up
What you can do with your workplace pension scheme when it's not right to switch is to make sure you've got your house in order.
Most people who have money purchase pension schemes with their employers opt for the default fund, which spreads the money across a number of different investments and usually ensures an average pay out. However, most employee schemes also offer the opportunity to cherry pick your own investments which could potentially earn you far greater returns. To do this you will have to research what the best funds out there are. You can do this in a number of different ways. Firstly, you can research funds yourself by keeping an eye on the financial press to see what the general consensus is on what's hot and what's not. On top of this, IFAs often have recommended lists of funds which they believe are going to be profitable. You'll have to look into the IFA's previous track record and the success of its other recommendations before deciding whether or not to trust their judgement. To switch from the default to a tailored scheme, seek the advice of your HR manager.
Of course, once again, you could potentially be opening yourself up to risk by going down this route. However, you can limit the chance of a complete meltdown, to some degree, by reviewing the performance of your fund at regular intervals, preferably every year. If you want to stick with the safest option it might be best to leave the box next to the default option ticked.
Remember, when you are making decisions, previous performance is by no means a certain measure of what's to come.
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Author: KYM Editor
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