Should you consolidate your pensions? Maybe you’ve seen the TV adverts about pension consolidation or perhaps the pile of pension paperwork you’re keeping is now bursting out the filing box.
If you’re interested in what pension consolidation could look like, this blog is for you.
Pension consolidation – why’s it important?
People are gathering more pensions. Since employers had to automatically enrol employees into a pension scheme in 2015, participation in pension schemes has soared. 22.6 million employees were enrolled in a pension as at April 2021.
An increase in pension uptake plus an increase in job changes from millennials has meant more pensions.
It’s estimated there’s £26.6 billion in lost across 3 million unclaimed pensions (Pensions Policy Institute, April 2022)
What is consolidating your pensions?
So, you’ve collected a few pensions and wondering if you can make your life simpler and not lose track of what you’ve got?
You might want to consider combining your pensions using a pension transfer. That’s pension consolidation.
Pension consolidation can lead to lower charges, less personal admin and you can keep track of investment performance more easily.
3 things to note before consolidating your pensions
1. Defined Benefit (DB) vs Defined Contribution (DC) pensions
If you have a defined benefit pension, sometimes known as a final salary pension or career average pension, it’s unlikely consolidating your pensions is the best thing to do.
Defined contribution pensions, also known as a personal pension, are essentially a pot of money in a pension, which are more likely to be suitable for pension consolidation.
2. Valuable guarantees or exit penalties?
Always check your existing plans do not have any valuable guarantees or exit penalties. Some pensions, particularly older ones, can have guaranteed growth rates, annuity rates (guaranteed income for life), or safeguarded benefits.
Exit penalties are getting less common but they do still exist. Always check if there’s a difference between the current fund value and the transfer value. If there’s a difference, there’s probably an exit penalty. You should weigh up whether it’s worth paying.
3. Your existing employer pension scheme
Completing a full transfer from your existing employer pension can cause a big administration headache. You might lose out on your employer contributions (free money!) and getting it set up again is a bit of a nightmare (can you tell I’ve got experience!).
It’s usually best to keep your current employer’s pension in place and if it’s a good one, it can make sense to transfer previous pensions into it.
The perfect pension
If you’ve decided to consolidate your pensions to reduce administration and keep track of your pension savings more simply, where should you be transferring your old defined contribution pensions to?
The ‘perfect pension’ may vary depending on your circumstance or objectives, but some considerations are relevant for everyone.
Low cost. £1 in cost saved is equivalent to £1 in return gained. Lower cost pensions can allow you to keep have more money to meet your retirement objectives.
Suitable investments. Your pension should have a range of investment options that includes suitable investment funds. Using investment funds that meet your risk profile and provide a good investment return over the long-term could provide higher investment returns over the long-term.
Retirement flexibility. If you’re approaching retirement, or in retirement, having the full range of pension withdrawal options available is important. This can help you choose the most suitable way of accessing your pension to meet your objectives.
Flexi-access drawdown on death. Some pensions only pay out a lump sum on death. Choosing a pension that allows your pension pot to be passed on through flexi-access drawdown, allows your beneficiaries to retain the investment funds within a tax efficient savings wrapper. This could save income tax and inheritance tax.
There are other important considerations: service level, online access and financial security included.
You may want to use an independent financial adviser when consolidating your pensions. Here are five questions to ask your financial adviser (link to follow) and help you choose the right adviser for you.
Benefits of pension consolidation
There key benefits of pension consolidation are outlined below:
Simpler administration and easier to review. One pension in one place is clearly easier to look at than multiple.
Investment performance could be better. Having a wider range of investment funds and one cohesive investment strategy could lead to higher investment returns.
It can reduce costs. One larger pension pot could benefit from preferable charging rates to multiple smaller pots. In addition, some older style pensions can have high charges.
More flexibility of drawing money in retirement. New pension rules were introduced in 2015 to increase the flexibility of taking money out of your pension. Not all current pensions allow full flexibility when it comes to drawing a pension.
Drawbacks of pension consolidation
Losing valuable guarantees. You could lose valuable guarantees when consolidating your pensions.
Complexity of pensions. As pensions are quite complex. You could make a bad decision that is difficult to reverse.
Time out of the market. During the pension transfer, investment funds will usually be sold with your current provider, transferred as cash and rebought with your new provider. You could lose out on investment returns If investment markets increase during this period.
Process of pension consolidation
Consolidating your pensions is meant to be quite simple.
Ask your current pension providers for a transfer quote to confirm the value of your pension transfer and any penalties.
Contact your new pension provider and request a pension transfer by providing them details of your current pensions. Usually this is done by an online or postal form.
However, it can be an administrative burden. It took me a total of 6 months to transfer my old employer pension to a DIY platform and 8 phone calls between providers in 2023. Service levels in the pension world could sometimes be better.
Should you use pension consolidation?
I can’t say you should use pension consolidation without understanding your circumstances and objectives and full knowledge of your current pensions. There’s no single correct solution for every individual – we’re all different after all!
If you wish to explore DIY pension consolidation, please make sure your new pension is better than your old and you’re not giving up valuable benefits.
It may be worth consulting an independent financial adviser to ensure you’re making the right decisions.
Risk warnings
The blog above does not constitute financial advice and is meant to be used as guidance only.
You should seek independent financial advice before transferring your pension.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pensions Regulator.
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