Should I consolidate my pensions?
Consolidating your pensions, otherwise known as pension consolidation, can save you money, time and paperwork. This article will help you understand whether it’s a good idea to consolidate your pensions and highlight the key things you need to consider.
What is pension consolidation?
If you’re like most people, you will have picked up several pensions over the course of your working life. Having several pensions with different providers can make it difficult to keep track of how they are performing, and how much you’re paying in charges. The paperwork alone is enough to put most people off!
Pension consolidation is where you transfer one pension to another. By combining your pensions, you can significantly reduce how much you pay in charges. You’ll receive less paperwork and can more easily keep track of how your pension is performing.
Pension consolidation is particularly useful if you’re planning on retiring in the near future. Many older-style pensions do not allow you to flexibly withdraw money from your pension. Consolidating your pensions into a newer, more modern pension can provide you with more flexibility around how money is withdrawn at retirement.
Four reasons why you should consolidate your pensions
There are lots of reasons why you might want to consider merging your pensions into one pot:
1. It makes them easier to review
Keeping track of your pensions isn’t easy – particularly when you have several pensions with different providers. By combining your pensions together, you can more easily keep track of them and see how they’re performing.
With one pension, you have complete visibility over your money. If you notice that your pension isn’t performing very well, you can make changes quickly, without having to contact multiple pension providers.
You will only have to interact with one pension provider, saving you time, hassle and paperwork.
2. You can reduce your pension costs
There’s a good chance that you will be able to reduce your pension costs by combining them together. All things being equal, the less you pay in charges the more you have for retirement.
Some older-style pensions come with very high charges. These can erode your pension value over time, reducing how much is left for your retirement. By consolidating your pension into a newer style of pension, you can significantly reduce your costs.
3. Potential for improved investment performance
How your pension is invested will determine how much it rises and falls in value.
Some pensions only provide access to a few investment funds, which may not perform very well. Whereas more modern pensions can provide access to thousands of different investments.
By consolidating your pension, you can increase the range of funds available to invest in. This gives you more choice and flexibility to choose an investment strategy that’s right for you.
4. More flexibility when it comes to retirement
It used to be the case that when you reached retirement, you had to use your pension to purchase an annuity. The rules changed in 2015, allowing people to flexibly withdraw an income from their pension pot.
Despite the rule change, most pensions are unable to facilitate flexible drawdown. This is because the pension was set up before 2015 when purchasing an annuity was the only option. Most people today flexibly withdraw an income from their pension. They are often shocked to learn that their pension provider cannot facilitate this.
You may need to merge your old pensions into a newer pension if you want to take advantage of flexible drawdown. This is often a key reason why people consolidate their pensions.
Four reasons NOT to consolidate your pensions
Although there are clear benefits to combining your old pension pots, it isn’t for everyone. There are some instances where you will be better off sticking with your current pension plans.
1. You have a final salary pension
If you have a final salary pension, then consolidating your pension isn’t likely to be the best thing to do.
Final salary pensions, otherwise known as ‘defined benefit pensions’, provide a guaranteed income for life. What’s more, this income tends to rise with inflation. These are very valuable benefits that will be lost if you consolidate your pension.
Moreover, the pension will likely provide your spouse with an income for their lifetime.
2. You have valuable guarantees
Some pensions come with valuable guarantees. These include guaranteed annuity rates, protected tax-free cash or guaranteed minimum pensions. These are known as ‘safeguarded benefits’ and are typically lost if you consolidate your pension.
You should check with your pension provider whether safeguarded benefits apply before combining your pension with another one.
3. Your pension receives employer-matched contributions
If you’re an employee, chances are that you and your employer both pay into your workplace pension. Typically your employer will match your pension contributions up to a certain level.
If this is the case, then you don’t want to transfer this pension to another pension – as you will lose the employer-matched contribution.
You may be able to combine other pensions with this pension, however. You should check with your workplace pension provider to see if they will allow you to transfer in other pensions.
4. You will pay an exit fee when transferring away
Some pensions will charge you an exit fee if you decide to transfer away. The exact amount and the terms under which a fee applies will vary between pension providers.
This can reduce the benefit of consolidating your pensions, even if there is a cost-saving to doing so. You will need to compare the exit fee payable with the annual cost saving to determine if this makes sense.
What to check before consolidating your pensions
Before combining your pensions together, you will want to check that you are not going to be worse-off. The below summarises the key things you should check before consolidating your pensions:
– Valuable guarantees – make sure to check if your pension has any valuable guarantees (safeguarded benefits), as these will be lost if the pension is transferred.
– Investment costs – compare how much you currently pay in charges with how much you will pay once you have consolidated your pensions.
– Investment returns – check how your pension has performed over the last one, three and five years and compare this with the new pension.
– Investment range – check how many funds your current pension allows you to invest in and compare this with the new pension.
– Retirement options – check how you can withdraw an income at retirement, and whether your new pension provides flexible drawdown.
This is not an exhaustive list but covers the key points. You will need to weigh up the benefits and costs of consolidating your pensions to determine if it’s the right thing for you.
If you would like some help, you can book an initial financial consultation with one of our independent financial advisers. We have a team of pension consolidation experts, available to guide you through your options and advise you on the best course of action.
How to consolidate your pensions?
If you’re looking to combine your pensions together, you can often do this yourself. To get started, you will need to contact your current pension providers and obtain a transfer quote. This will tell you the value of your pension for transfer and include any exit penalties.
You will then need to contact your new pension provider and request for them to transfer over your old pension. They will typically have a form that can either be completed online, over the phone or by post.
The new pension company will then contact your old pension company, requesting that they consolidate your old pension into your new one. This typically takes between four to eight weeks.
Alternatively, you can work with an independent financial adviser who will be able to arrange this for you. Before consolidating your pension, they will provide a full review of each of your pensions, making sure that pension consolidation is the right thing to do. They will then complete the paperwork for you.
If you would like advice around pension consolidation, you can book an initial financial consultation with one of our independent financial advisers.
Is pension consolidation right for you?
Unfortunately, there’s no one-size-fits-all when it comes to pension consolidation. What’s right for one person isn’t right for another. Whether to combine your pensions will depend on the type of pensions you have and your personal circumstances.
If you’re looking to do it yourself, you should check to make sure that you’re not giving up any valuable benefits, and that your new pension is demonstrably better than your old pension.
Financial Advisor Bristol and Pension Advisor Clifton
About us: Frazer James Financial Advisers is a financial advisor, based in Clifton, Bristol. As an independent financial adviser, we’re able to provide independent and unbiased financial advice. We provide independent financial advice, pension advice, investment advice, inheritance tax planning and insurance advice.
If you would like to speak to a Financial Advisor, we offer an Initial Financial Consultation without cost or commitment. Meetings are held either at our offices, by video or by telephone. Our telephone number is 0117 990 2602.
Frazer James Financial Advisers is located at Square Works, 17 – 18 Berkeley Square, Bristol, BS8 1HB.
This article provides information about investing, but not personal advice. If you’re not sure which investments are right for you, please request advice.
Remember that investments can go up and down in value, you may get back less than you put in.