Pension Consolidation – should you combine your pensions?
Our Pension Transfer Specialists have put together a handy guide to help you decide whether Pension Consolidation might be right for you. You can also navigate using the links opposite or check out our frequently asked questions below.
Should I combine my pension pots?
If you’ve had more than one job in your lifetime, It’s possible that you’ll have built up multiple pensions. There’s no limit to the number of private pensions you can build up over your lifetime but you might find it difficult to keep track of them all if you’ve built up multiple pension pots. We are frequently asked by clients “should I put all my pensions together?” – here’s a quick overview:
Combining your pensions into one pot could:
- Make it easier to manage your finances and track your retirement goals
- Offer a greater choice of investment funds and access potentially higher returns
- Offer increased flexibility for accessing your pension
- Potentially lower your investment costs
If you have pensions with valuable guarantees, it might not be in your best interests to move it, even if it makes sense for the reasons listed above. Check out our blog post What to do with multiple pensions for more details of the pros and cons of combining your pensions.
What to do with multiple pension pots?
When you leave a job your pension stays invested in your old pension scheme unless you opt to move it. The value of your old pension pot will be reliant on the investment performance of the pension fund your old employer has chosen and will be subject to fees as set out by the scheme.
You’ll usually have 3 options for your old pension pots
- Leave it where it is
- Move to your current employer’s scheme
- Move it to a Private Pension that you’re in charge of
You may have the option to move your old pension to your new employer’s pension or you could combine multiple pensions in a Self-Invested Personal Pension.
Important Note: If you have a Final Salary Pension the situation is very different. The amount you receive is guaranteed. It is not subject to investment fees or reliant on the performance of the fund (unless it fails, and you’ll be covered by the PPF). Read our Definitive Guide to Final Salary Pensions for more information.
What Age Should I Consider Consolidating?
There’s no right or wrong age for combining your pensions as long as it makes financial sense considering all the risks and benefits and you are doing it for the right reasons. It’s likely you’ll have different reasons in your 50s and 60s than someone who’s considering a transfer in their 30s or 40s.
If you are approaching retirement or want to flexibly access your pension from 55, then you might find it easier to combine your pensions.
Equally,if you want to purchase an annuity at retirement, you may be offered a better rate if you combine your pensions.
And if you want to flexibly access your pension through pension drawdown, you’ll almost certainly find it easier to keep track of how much you have in your pension pot and what charges you are paying if it’s all in one place.
If you are paying excessively high fees that could be reduced by moving elsewhere then the earlier you move your pension, the better as the effect over time could erode the value of your pension pot.
If you invest £8,000 a year for your retirement 30 years away, and the fund’s total costs are 2.5% of the money invested. Assuming your invested pension achieves an average return of 6% a year before fees, your savings pot will grow to £414,360.
But, if the management fees were lower, at 1.5% , you would have made £502,668 — a £88,308 difference shown on the chart. If you continued to pay the higher annual charge, 17.6% of your savings would disappear in extra costs.
Source: Financial Times Fee Calculator
Seeking control and visibility
What gets measured gets managed. So if you’re seeking a greater degree of control and visibility, this might be achieved by having all of your pensions in one, easy to view, place you can see if you’re on track to reach your retirement goals.
Whether your old pension was underperforming, charging high fees, or it just made sense to combine your pensions, once you’ve moved it, you are in control. We can help you choose the best investments and products to suit your long-term plans.
The Benefits of Pension Consolidation
As with most financial decisions, there can be pros and cons to combining your pensions. As long as you’re not giving up valuable benefits it can make a lot of sense to manage your pensions in one place, especially if you’re moving them to a Self Invested Personal Pension (SIPP).
Some of the benefits include:
Greater investment choice and control
Flexibility to access drawdown
Potential to save on fees
Potential to access better-performing investment funds
Leaving an Inheritance*
*It’s worth noting that Defined Contribution Pensions and SIPPs can usually be passed on free of Inheritance tax to named beneficiaries. The fewer pension pots you have, the fewer pension scheme trustees you’ll need to keep updated of address changes, beneficiary changes and it will be easier to manage.
Find out more about the benefits of transferring multiple pensions.
Reasons Why You Shouldn’t Transfer
When clients ask “should I combine my pensions” each case is assessed individually, as it might not be right for you. Whilst not all of the Risks and Benefits may apply to each person, it’s important to seek individual advice based on your circumstances to make sure that you don’t make a costly mistake.
Risks of Pension Consolidation:
Cost of moving
New product could actually be more expensive
Potential loss of guaranteed benefits (annuity rates, tax-free cash, life insurance)
Potential penalties to transfer
Potential loss of loyalty bonuses, terminal bonus etc.
N.B. If you have valuable guarantees with your old pension, you may be better off leaving it where it is.
Read more about the risks and benefits in our What to do with multiple Pensions blog post.
The Impact of High Charges on Your Pension
Some older pension funds can have high investment charges compared to what is currently available on the market, so it may be possible to match the quality of the investments without the high price tag.
High investment charges can erode the value of your pension pot over time. For Example: If you invest £8,000 a year for your retirement 15 years away, and the fund’s total costs are 2.5% of the money invested, and the fund manager achieves an average return of 6% a year before fees, your savings pot will grow to £161,965
But, if the management fees were lower, at 0.5%, you would have made £195,752 — a £33,787 difference shown on the chart. As a result of the 2.0 percentage-point higher annual charge, 17.3% of your savings has disappeared in extra costs.
Consolidation for Pension Drawdown
Flexible Drawdown was introduced with the Pension reforms of 2015. It removed the previous limits on how much you can take from your pension in any one year.
It’s now possible to access your Pension from 55 and you can take up to 25% of your pension as a tax-free lump sum, but you don’t have to take it in one go. If you want to take it in chunks or take an income from your pension, you can do that too.
Because Pension Drawdown is fairly new, some older pension funds aren’t set up for it, and you may need to move your money to a different pension that allows it.
As long as you’re not giving up valuable benefits, it may be easier for you to manage your money in retirement if it’s all in one place.
You might also be interested in trying our pension drawdown calculator (click here).
Multiple Pensions Tax-Free Lump Sum
Another benefit of the Pension Freedom changes is that you can now take 25% of your pension pot as a tax-free lump sum once you turn 55.
If you have multiple pension pots you are entitled to take a 25% tax-free lump sum from all of them or If you have £30,000 or less in all of your private pensions, you can usually take everything you have in your defined benefit pension or defined contribution pension as a ‘trivial commutation’ lump sum. If you take this option, the first 25% is tax–free, you’ll pay tax on the rest.
If you are a higher rate taxpayer, or if this money takes you into the higher rate tax bracket for the year, you could end up paying 40% tax on 75% of your pension pot.
How Do I Find My Pensions?
How much does it cost to transfer a pension?
Should I transfer pension from previous employer?
How long pension transfers usually take?
Our Pension Transfer Specialist, Simon Garber answers some of your most frequently asked questions about pension consolidation.
Find my Pensions?
How do I find my old pensions? If you want to trace an old or lost pension pot you can use the government’s free pension tracing service to track down old workplace pensions.
How much does it cost to transfer a pension?
The full cost of transferring your pension will depend on a number of factors:
- How much you pay for transfer analysis and advice
- Any exit fees or penalties from your existing pension providers
- What type of investment you choose afterwards
- and whether you choose to receive ongoing advice
At 2020 Financial we work on a transparent, fee-based structure, details of which can be found on Our Fees page. If you book a free initial consultation we will be happy to talk you through the options open to you and the potential costs of moving your pension/s.
Whilst the cost of transferring your pension may seem expensive, you are buying a future plan for your money that suits your retirement goals. With the right financial advice, your chances of achieving your financial goals are greatly increased. A good financial advisor should help you maximise returns in a strong market and minimise your exposure to risk and loss in a downturn.
Should I transfer pension from previous employer?
When you move jobs, you leave your old workplace pension scheme, but you don’t lose the benefits you have built up. You can keep your old pension where it is or move your pot to the scheme offered by your new workplace. But if you are thinking about doing this, it is important to do it for financial – and not emotional – reasons. It’s crucial that you don’t move your pension pot out of a first-rate scheme simply because you want to cut all links with an old employer.
If there is no compelling reason to leave your old pension where it is, you may have the option to port your old workplace pension to your new employer’s scheme. Alternatively, you could move it to a SIPP where you have more control over how it is invested.
How long do pension transfers usually take?
The research stage normally takes X. We’ll arrange a chat over the phone, by skype/ facetime or in person and talk through some details with you and establish your goals, our expert advisors will then carry out research to understand if you have any valuable benefits attached to your pension that it would be in your interest to keep. We’ll also draw up a plan to maximise your investment returns moving forward to help you meet your retirement goals.
Once you decide to transfer we can get the paperwork drawn up in a couple of days.
Depending on the complexities of your scheme, and the responsiveness of your pension scheme trustees it could take anywhere between a couple of weeks and a couple of months for the entire transfer to be completed.
PASSIONATE ABOUT PENSIONS
Pension Transfer Specialists since 2007
Experts in Defined Benefit Pension Transfer
FCA Regulated, Independent Advice
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