You might have private pensions or occupational schemes provided by your employers through the years. Either way, the introduction of auto-enrolment looks set to greatly increase the number of pension pots you might accrue during your lifetime.
As you approach retirement and begin to revisit your financial plan, contacting scheme administrators for current valuations and up-to-date quotations, you might consider pension consolidation – that is, transferring all your pensions into one single pot.
But is consolidation a good idea? Read about the pros and cons and, if you’re still unsure, speak to us for advice.
The pros of pension consolidation
1. If they’re all in one place, it’s easier to keep track
One of the most obvious benefits of consolidation is that by putting all of your pensions into one place, it’s easier to keep track of them.
A recent report in the Telegraph suggests that the average UK citizen has a total of 11 jobs in their lifetime. Since auto-enrolment was introduced, that could mean that you have as many as 11 different pension pots.
Rather than requesting and receiving 11 sets of statements each time you want to revisit your financial planning, you might consider putting them all into one place and receiving one statement showing your full pension fund.
2. It could increase the size of your pension pot
If you have several different pension pots you’ll likely have several different scheme administrators too. This means different charging structures and differing investment performance.
By finding out which scheme has the lowest charges, or the best performance, and transferring all of your existing pots into that scheme, you’ll multiply the benefits.
Aviva states that older pensions generally have higher charges and that moving out of these into a modern pension could save you money, increasing the size of your pot. ‘A small reduction of 0.5% a year might not sound like a lot, but it could increase your eventual pension pot by 15% over your whole working life.’
3. You might have more control
Modern pensions often give investors increased fund choice and the option to choose your own investments. You might also be able to track and switch investments using online portals, allowing you more control and real-time access to how your fund is performing.
The cons of pension consolidation
1. Larger pots could attract higher rates of tax
The main disadvantage of pension consolidation is that when you eventually come to take benefits, the one-off amounts will be larger. That could mean that you push yourself into a higher tax bracket.
If you opt to access your pension pot flexibly and take an Uncrystallised Fund Pension Lump Sum you might find you get heavily taxed.
HMRC tax UFPLS payments on a ‘month 1’ basis. This means that they assume that the amount you receive is the first in a series of regular payments to be made throughout the year. You only receive 1/12th of your true tax allowance and are taxed heavily as a consequence.
Although you can claim the overpaid tax back, if you’re planning to use your pension to fund a specific project – world travel or a house renovation for example – you’ll need to consider the impact of receiving less than you thought you would.
And factor in any delays you might experience in getting the tax back.
2. You might lose the added benefits that some plans have
Some pension plans have added benefits that only payout if you remain a member of the scheme at retirement.
Guaranteed annuity rates will calculate your retirement income based on guaranteed – and often favourable – rates, but they will be specific to the scheme and most likely won’t apply if you transfer your fund elsewhere.
Section 32 Final Salary schemes might have a Guaranteed Minimum Pension, promised at outset, and paying a more generous level than you’d receive if you transferred your pot into a Defined Contribution Scheme.
3. There might be transfer charges to pay
The process of transferring your pension to a new provider will likely not be free. If you have 11 pension pots you might find yourself paying ten lots of transfer charges.
Weight the cost of the charges against the perceived benefits of consolidating.
Making the right choice
Whether or not pension consolidation is right for you will depend on your circumstances.
If you have a lot of smaller pots you might consider moving them all into one place. This can make it easier to keep track of them and might lead to a larger pension pot at retirement.
It’s possible though that a larger pot will lead to increase tax and you’ll need to factor in the costs of transferring.
If you’d like to discuss whether pension consolidation is right for you, get in touch. Please email firstname.lastname@example.org or call 0115 933 8433.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.