With the average Briton having six jobs throughout their working life that could potentially mean you have several different pension pots in your name. So, how do you keep track of all of them and their performance? Do you simply let them sit there and do “their thing”, or do you actively manage each one to ensure your retirement is as financially comfortable as possible?
The majority of people will say the former – rather than dealing with different pensions providers and paperwork, they may just let the money sit there and trust it to fate.
This doesn’t have to be the case though. By combining all your pensions in to one pot, this may make them easier to manage as well as enabling you to see how your investments are performing.
BUT – you should note that consolidating your pension pots is not always appropriate for everybody and that is why seeking independent financial advice, ideally with a Pension Transfer Specialist, would be a sensible place to start.
So, with that in mind: should you consolidate your pensions?
Are you eligible?
Firstly, you need to check that your pensions can be moved. This depends on the type of pension you have (e.g. a money purchase occupational scheme, a personal pension, or a final salary scheme) and in some cases, who the scheme is with.
As an example, if you want to transfer any defined benefits into an existing defined contribution scheme so that you can combine your pension pots, you’re no longer allowed to do this if your defined benefits are in an unfunded public sector scheme. (Unfunded schemes include the Teachers’ pension; NHS; Civil Service etc. The main funded public sector pension scheme is the Local Government Pension Scheme).
Why consolidate your pension pots?
If your pensions pots can be moved, then you may want to consider consolidating your pensions to:
- Make it easier to estimate the income you can expect to receive from your pension at retirement.
- Simplify the administration by having everything with a single provider – it may be difficult to keep track of the fees you’re paying if you have several different pension pots with different providers.
- Move them to a pension scheme that fits better with your investment outlook, your attitude to risk or your plans for drawing benefits. This may be a scheme that has access to a better range of funds or can provide more flexible drawdown arrangements when you reach retirement age.
- Improve the fund performance – do your current schemes offer a wide and competitively priced fund choice? Have your funds performed as well as other funds of comparable risk level that are available across the open market place? Underperforming funds cost investors billions of pounds of lost returns each year.
- Access to professional advice – perhaps your current scheme does not give you the option to receive any ongoing advice? If you are want a more bespoke arrangement based around your individual objectives and risk profile, this might only be possible within a new scheme.
Are there any downsides?
Yes, there can be. For example:
- Some pension plan providers will charge you an exit fee if you move your pension away from them, which could be high and deplete your funds.
- Certain pensions contain valuable fixed benefits that you might be best advised to hold on to. If you transfer these to a new scheme these will be lost. Deferred members of final salary pension schemes will need to speak to an FCA regulated Pension Transfer Specialist before they can transfer to a scheme with flexible benefits such as a SIPP. Other benefits that might be lost on a transfer could include the provision of a Guaranteed Annuity Rate at retirement. If any of your schemes contain guaranteed benefits, a good starting place will be to read our comprehensive Guide to Final Salary Pension Transfers.
- Whilst transferring to a new scheme might provide an opportunity to reduce your costs, it could also increase the overall costs, as you may need to add the cost of any advice you receive as well.
- If you are close to retirement age, it may be difficult to recoup these costs even if you do move to a better performing fund.
Just from the points we have covered in this article, it is clear that there are many pros and cons you should consider before consolidating your pensions. That is why it is imperative that you fully understand all the risks and costs involved, and why our recommendation is that you seek independent financial advice.
In fact, if any of your pension pots have guaranteed benefits that are worth over £30,000, then you are legally obliged to receive independent advice before you move pension providers.
Is pension consolidation right for me?
As we have discussed, for many people, consolidating their pension can be beneficial, providing more control and flexibility and the potential to improve performance and even pay lower fees all within one easy to manage pension.
But, there can be downsides too, as we have discussed, and the consequences could affect how much pension you get in the future. In a nutshell, making the wrong decision could see you lose out financially, with high exit and management fees that you’ll never get back.
That is why seeking independent financial advice from a pensions specialist should be considered. After all, this is your financial future you are playing with, and to get it wrong could have serious implications.
At First Equitable we are pensions specialists and have many years of experience helping clients achieve positive outcomes with their retirement planning. If you would like to receive some friendly and helpful advice, in a language you can easily understand, then please get in touch by giving us a call or filling out a contact request form and we will call you back at your convenience.