I want an investment product offering compound interest & pension consolidation advice
19 July 2021
Question by Craig
Can you advise me on the best approach when looking to invest in a product that offers compound interest? I’m thinking about funds rather than bank accounts. I also have 4 different pensions on the go. Is there merit in keeping these separate to diversify the risk? Or should I consolidate them into the new scheme I've entered with Aegon. This scheme has a 0.33% charge - is that high or low? Also, what would the tax treatment be for them when I retire? Would they be considered in aggregate by the tax man?
Answered by Helena Wardle
Good questions! I'll break my answer into two parts to make sure I address your points.
Firstly, on the best approach to investing -
It depends on how long you want to invest for, and how much risk you feel prepared/can afford to take. Investing into funds typically needs a longer term plan, due to the risk that your investment may fall in value as well as increase. If you're not yet familiar with this, then a good starting point would be researching and getting an understanding of the associated risks. Boring Money has some great investment guides available to help you, and there are also Government guides to investing on the The Money Advice Service. These sites offer you beginners guides with easy to read information on how to invest.
Depending on what you are saving towards, you would then need to choose the type of product you want to hold the investment in, to suit your plans.
For example, you can buy different types of investment funds and hold these in different products. ISAs and pensions are both products which you can invest funds into, and both are tax efficient. However, if you are saving towards retirement and can afford not to access the money until then, a pension is typically more tax efficient due to the tax relief you get on this. This is why when you are considering your approach to investing, it’s important to consider what you are saving towards, and what you want to do with the money.
Once you are clear on this, you then need to select the most appropriate investment fund to suit both your goals and feelings towards risk. There are tools available to help you do this, and the Boring Money investment guide talks you through the basics in a simple manner.
Secondly, on your pensions -
Consolidation often makes it easier for people to track what they have, and which pension they may get in retirement. However you need to be careful, as some pension contracts may have guarantees or valuable benefits attached which you could lose if you transfer them. The pensions may also have penalties if you transfer the contracts before your retirement date.
On the other hand, some older pension contracts have high charges, which may mean it could be cheaper for you to move it to your new Aegon scheme, as the annual charge of your Aegon pension is low.
If you are thinking of consolidating, you may also want to make sure that you look at what your Aegon pension invests into, and compare this to your other pensions. Sometimes the new contracts could limit your investment options to a few funds - particularly if it’s a workplace pension scheme. Also, if you change the investment from the default fund selected by your employer, it may increase the charges.
Most people just leave their work pensions invested in the default investments, and if the other 3 pensions were set up in this way you may find the investments are fairly similar to your Aegon plan. Your pension statements may not have necessarily have this information, so you might need to contact your pension providers to ask questions which will allow you to compare them with your new Aegon pension. Therefore unfortunately there isn't a simple answer to this question, but hopefully I've helped you understand how to compare between what you have and your new pension.
If you need more detailed advice you may be better off contacting a financial adviser, who will be able to help you understand the options and best approach for you.
At retirement, your pensions should be considered in aggregate by the taxman for your overall pension savings limit, called the Lifetime allowance, which is currently £1,030,000. If your pensions exceed this at retirement you'll have an additional tax charge. You'll see this in the T&Cs on the pension paperwork when you start drawing benefits.
Individually each of your pension contracts should allow you to draw 25% of the value as a tax free lump sum, and the remaining 75% of your pension should be taxable as income, as you draw it. This works in the same way as income tax on your earnings. The tax rate you pay depends on how much you earn from other income sources, and how much your pension income is.
I hope this helps.