If you’ve paid into a number of different pensions over the years, perhaps because you’ve worked for several employers, keeping track of all your retirement savings isn’t always easy.
According to the Department for Work and Pensions (DWP), on average we each have 11 jobs over our lifetimes, which can mean a whole lot of pension paperwork to keep on top of.
What is pension consolidation?
Consolidating pensions that are similar into one plan can make managing your money more straightforward, as you’ll only have one pension statement to review each year and one set of investments to keep an eye on, and you might also be able to reduce the charges you pay.
It’s important however to always check that by combining your pensions, you are not giving up valuable pension guarantees – for example transferring a final salary pension into a personal pension plan is rarely the right decision.
Consolidating pensions can be extremely helpful, but shouldn’t be entered into lightly and it definitely won’t be the right option for everyone. Here are some of the things you need to think about before taking the plunge and if in doubt, always speak to a professional financial advisor.
How do I consolidate pensions?
If you’re thinking about consolidating your pensions, you first need to establish which kind of pensions you’re hoping to move.
There are two main types of pension, defined contribution plans and defined benefit schemes.
Defined contribution pensions
With defined contribution pensions, the amount you end up with at retirement depends on how much you (and your employer if it’s a company scheme) have paid into your pension, as well how the investments in your pension savings have performed.
It’s usually relatively easy to transfer from this type of pension to another defined contribution scheme. You’ll need to get in touch with your current pension providers and check that they will allow you to transfer, and find out how much moving your pension is going to cost. You’ll then need to contact the provider you want to move your plans over to and check that they will allow you to transfer.
After filling in a bit of paperwork, the process is usually quite straightforward and takes around 4-8 weeks to transfer depending on your providers.
Combining defined benefit pensions
Defined benefit pensions, otherwise known as final salary pensions, provide a guaranteed income at retirement. This income is based on how many years you’ve belonged to the scheme and a proportion of your final year’s pay.
Having a guaranteed income is extremely valuable, so it is rarely the right decision to move out of this type of plan into a defined contribution plan and getting professional advice is crucial. If your pension transfer value is worth more than £30,000, the UK’s financial regulator has made it compulsory for you to talk to an independent financial adviser (IFA) before you proceed, even if you subsequently decide not to follow their advice.
Even if your pension sum is less than £30,000, you should still consider seeking financial advice. An adviser will work out whether you’re likely to receive a higher annual income in retirement if the funds in the new pension pot generate a good investment return, compared to the total annual payments the final salary scheme will pay and will give you a personalised recommendation based on your individual circumstances. Find out more about transferring final salary pensions in our article Should I transfer my final salary pension?
Is it better to consolidate pensions?
Combining several defined contribution pensions into one plan can have several advantages:
You may save money by consolidating pensions
Older pensions tend to have higher charges, often in excess of 1%. Steep charges can have a big impact on the amount you end up with at retirement as they will eat into any investment growth, so it’s worth seeing whether you might be able to transfer your pension to a plan with lower charges.
According to research by Profile Pensions, which specialises in pension transfers, customers coming to it for advice are paying over four times more for their pensions than they should be. As a general rule, pensions with fees over 1.5% are the most expensive, whilst those charging less than 0.5% are the cheapest.
Consolidating pensions can make them easier to manage
It can be really difficult to keep track of lots of different pensions, so transferring them into one plan can make them easier to monitor. You’ll also have less paperwork to deal with and having all your pension savings in the same place can make it easier to keep track of the underlying investments in your pension and see whether you’re on track to achieve your retirement goals.
Pension consolidation may give you access to a wider choice of investment options
Depending on the pension you’re transferring to, you may be able to choose from a wider range of investments. These may be more appropriate for you than the investments your retirement savings are currently invested in and may better suit your approach to risk. It’s important to check where your pension savings are invested as the funds you choose could have a significant impact on the income you end up with at retirement. Find out more in our article Where is my pension invested?
Self-invested personal pensions (SIPPs) usually offer the widest choice of investments, but you’ll be responsible for actively choosing how your pension savings are invested so if you’re unsure where to invest, you should get professional advice. If you’re 50 or over and have a defined contribution pension, you can get free guidance available on the options available to you from the Government’s Pension Wise service.
However, if you want personal recommendations or advice about your specific circumstances, you’ll need to seek professional financial advice. You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guides on How to find the right financial advisor for you or How to get advice on your pension.
If you think you might be interested in speaking with a financial advisor, VouchedFor is currently offering Rest Less members a free pension check with a local well-rated financial advisor. There’s no obligation, but once you’ve had your check, the advisor will discuss the potential for an ongoing relationship if you think it might be useful to you.
Downsides of pension consolidation
There are some potential downsides to consider if you’re thinking of pension consolidation so it’s vital to seek professional independent advice if you want to be certain this is the right course of action for you.
You could lose important guarantees
Some pensions offer valuable guarantees or benefits which you will lose if you transfer your savings into a different plan. For example, they might allow you to take out more than a 25% tax-free lump sum at retirement. You might also lose any right to take your pension at a certain age, so always make sure you fully understand what you might be giving up if you transfer away from your current pension. Your existing providers will be able to inform you about any special guarantees or benefits associated with your current plan so you can make an informed decision.
Exit penalties for consolidating pensions
A handful of pension providers charge an exit fee when if you move your pension elsewhere. Sometimes this charge takes the form of a flat fee, or it may be a percentage of your pension pot. Usually it will be deducted from the value of your pension when you transfer. Make sure you ask your current provider about any penalties and costs, so you know exactly how much you might have to pay.
You might be ‘out of the market’ while you transfer
If you’re selling investments to transfer cash into your new pension, you will be ‘out of the market’, until you re-invest your money. Some transfers between pension schemes can take several weeks, and so any gains that you might have made during an ‘out of the market’ period will be lost. Conversely, if the market dips during this time, you won’t suffer any losses.
You might be able to make an ‘in-specie’ transfer of your holdings to a new provider which means they are moved across without having to be sold, but this process can be time-consuming and complex. Most people therefore decide to simply sell their investments and transfer cash.
Who do I transfer my pension to?
That depends on the sort of pension you’re looking to transfer to. If you’re looking for a relatively hands off approach, several providers, such as Nutmeg, PensionBee and Evestor*, enable you to consolidate your pensions, offering a range of “ready-made personal pensions” for you to choose from. The right one for you will depend on your investment timeframe and approach to risk, but you should seek advice if you’re not sure whether consolidating pensions is right for you, or which pension to transfer to.
If you’re a more experienced investor who’s comfortable managing your own investments and are considering transferring to a SIPP, again there is a wide choice of providers to choose from including Hargreaves Lansdown, AJ Bell and Interactive Investor. Make sure you compare several different offerings before deciding where to move your pensions to, or ask an adviser to do this on your behalf. You can find out more about how SIPPs work and how different providers’ costs compare in our article Everything you need to know about SIPPs.
Beware pension scams
If you’re considering pension consolidation, do watch out for pension scams.
Any firm you deal with should be authorised and regulated by the Financial Conduct Authority (FCA). Check whether they are listed on the FCA Register or by calling the FCA helpline on 0800 111 6768.
You should also get impartial information or advice before making any significant changes to your pension. If you have a regulated financial adviser, it can be helpful to speak with them in the first instance. You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guides on How to find the right financial advisor for you or How to get advice on your pension.
If you don’t have an advisor, then the government supported Pensions Advisory Service provides free independent and impartial information and guidance. If you’re aged 50 or over, you can also speak with Pension Wise, another government supported resource who offer free and impartial guidance about your pension options.
Jonathan Watts-Lay, Director, WEALTH at work, comments; “It seems that scamming is rife, particularly with those aged 55 and over, as they have access to significant amounts of cash through their pension. Often the reason that people get scammed is because they are offered an amazing return, something that they believe they can’t get anywhere else. The crucial thing to remember is that scams don’t look like scams, and can be difficult to spot. Whatever investment you are planning to make, it is important to check out the company with the FCA first. If they haven’t heard of them you will have no place to go if they turn out to be fraudsters.”