Legacy pensions - why it pays to review them…

I’ve recently completed pension reviews for a couple of new clients, and this unearthed a number of issues about their existing pensions. The clients were unaware of the issues and that would have been costly, if left unchecked.

Surprisingly, many of the issues hadn’t been picked up by their previous adviser.

It also identified that whilst some of the pension policies would lose benefits if they were transferred, they still desperately needed vital investment overhauls – not all pensions are built the same!

As a result of our review, we were able to remove these issues, improve the pension benefits, tidy up and simplify the pension arrangements and provide structure to the investments. This will undoubtedly help the clients better achieve their longer-term retirement aspirations and will have much better options for their loved ones and beneficiaries of their financial legacy.

The reality is that the evolving pension landscape means that a lot of people now have multiple pension pots with different benefits and potential disadvantages compared to what is available today. So why don’t more people have their pensions professionally reviewed?

A common reason is because they think it will cost them lots of money and they believe their pension was set up in their best interest and should still be fine now.

The reality is that it might not cost anything, the benefits should significantly outweigh the cost and the peace of mind of knowing your pensions are ‘future-fit’ and that there are no pitfalls awaiting can be priceless.

Here are the six most common issues we uncovered:

Pensions with the wrong level of risk

One of the issues we found was that the pension investments weren’t being managed according to the clients’ actual requirements; often taking too much or too little investment risk. Overwhelmingly, the investments had a bias to the UK, which has a greater concentration risk compared to global markets, and they had missed investment opportunities that exist globally as a result.

Thankfully our clients also reviewed their pensions with us before any of their ‘Lifestyling’ pension funds had a dramatically devastating impact on their pension values too.

‘Lifestyling’ is when the pension provider changes the investments over time to ‘lower risk’ in readiness for retirement. The idea is that this will create greater stability before buying an annuity or starting to draw from the pension. This may sound like a good idea in principle, but it has meant that some investors have lost 30% to 40% of their pensions, just before retiring, due to rising interest rates.

This highlights the problem of having generic investments that aren’t personalised.

Limited flexibility on death

Some of the older pensions could only pay a lump sum to beneficiaries on death rather than a regular income. This could be highly tax inefficient and not provide the intergenerational benefits that modern pensions offer. By transferring the pensions, those clients now have better tax and legacy benefits.

Overcomplicated pension structures

Some of the clients’ old company pension schemes needed layers of trustees and pension providers to grant permission to place instructions. This made it more difficult and much slower to change investments and request pension income, and would have made inheriting the pension more complicated too. The transfer has simplified the administration for the clients and at no additional cost.

Limited investment options

Often the investment options were limited. This has impacted the return potential and future pension value. Transferring these pensions has broadened the available investments often at no additional cost and provided a much better investment outlook.

Inflexibility and fewer options to access pensions

Some of the legacy policies couldn’t provide regular or partial tax-free cash drawdowns, which can be a preferred and more tax efficient option for many drawing from their pensions.

Most of the pensions also didn’t have good online access, making it more challenging to get basic portfolio and performance information and taking much longer to make pension withdrawals or make investment changes.

Pension rule changes - not knowing the financial implication of the Lifetime Allowance (LTA) being scrapped

This is one of the biggest changes to pensions since pension freedoms in 2015. The LTA was the pension amount above which you would need to pay tax. With this now gone, it saved them tax, but also created new opportunities they weren’t aware of.

Specifically, my client had protected tax free cash and by managing the order and amount of tax-free cash that was drawn from his different pensions has provided tens of thousands of pounds of more tax-free cash.

Do you have legacy pensions or know someone who does, and you’re not sure if they are fit for purpose today? Please get in touch with us if you’d like to discuss or review them.