Pension consolidation means combining all (or most) of your pension pots into one. You may have worked for a few different employers during your career. In this case you could have a collection of different pension pots. If you’ve spent time self-employed you may also have personal pensions to add to the mix.
Working out the best thing to do will depend on a number of factors, including what type of pensions they are, how much they are worth, if/how they are being managed, and whether they currently have any special guarantees attached.
Reasons to Combine Pensions
Reasons to combine your pensions may include:
- Reducing Management Fees
- Maximising the potential for better growth
- Convenience and simplicity
- Track your pension savings
Reducing Management Fees
Every pension pot you have will have its own annual management fees. Management Fees can vary considerably so understanding what you’re paying is important. For example a high fee and low growth could mean your pension is reducing in value each year. Combining your pension pots into a pension with the most competitive ongoing management fees can help eliminate some of the unnecessary costs.
Maximising the Potential for Better Growth
Do you know where and how your pension funds are invested? It’s likely, in the case of workplace pension that you will have been placed in a default risk rated fund or portfolio. Fund performance can make a massive difference in the value of your pension. If you have several pots, it’s likely you will be invested in a variety of funds that have performed differently and some pension providers only have a limited selection of funds. (Remember, that past performance is not a guide to future performance).
Convenience and Simplicity
Consolidating your pensions means you may have one pension pot. This is much easier than handling several and can help simplify your retirement planning. Managing multiple pensions involves more than just checking the balance. You want to make sure you are invested in the right fund for your risk profile. Remember this will change as you get nearer to retirement. Consolidating your pension via an Independent Financial Adviser can simplify your retirement savings and help ensure the funds are always invested in the right place for you.
Keep Track of Your Pension Savings
When you have multiple pension pots from various providers, you run a much higher risk of losing track of one or more of them altogether. House moves are notorious when it comes to paperwork getting lost – and if you lose the paperwork, you may not be able to inform pension providers that you’ve moved house. In this way pensions can get lost or forgotten about. Find out how to trace lost pensions.
Reasons Not to Combine My Pensions
Consolidating your pensions is usually the correct course of action. There are some circumstances in which it isn’t the best option. Some reasons not to merge your pensions are outlined here:
Defined Benefit or Final Salary
A final salary (or ‘defined benefit’) pension provides a guaranteed income for life, which is an extremely valuable benefit in an uncertain world. The pension won’t be subject to investment risk and in the case of scheme failure should be covered by the Pension Protection Fund. We cannot advise on the transfer of Defined Benefit or Final Salary Pensions
Guaranteed Annuity Rates
A guaranteed annuity rate or GAR gives you the option to buy an annuity with a much higher annual income that you would otherwise be offered from the open market. Having a GAR is usually a good reason not to transfer out, as by doing so you would lose it.
Penalties For Transferring or Loss of Benefits
It is possible that penalties may be applied for transferring or there may be other benefits included with the pension. Having an expert check before transferring can help avoid potential penalties and or the loss of additional benefits.