If you have held different jobs from multiple employers, this thought might have crossed your mind how many pension pots do I have now? How do I combine them? The term pension consolidation is just that – it’s the process of combining, or consolidating, all your pensions into a pot that rules them all.
We explain the key considerations of consolidating pensions in simple terms, how to choose the right pension consolidation providers, what to check for before consolidating, and the pros and cons associated. Here’s a summary of the steps included:
Pension consolidation involves transferring your pension plans to a single pot.
Consolidation can improve earnings, reduce administrative costs, recover lost savings, earn better benefits, save money, and streamline pension management.
You must consult a pension adviser before transferring over £30,000 held under a defined benefit scheme.
Consolidating might mean losing some benefits and guarantees.
What is pension consolidation?
Pension consolidation refers to moving, transferring, or combining most or all your pension pots into one retirement savings scheme.
As you move from job to job, each employer might place you into a new pension scheme. Trying to keep up with all the accounts can be pretty hectic, so it makes sense to have all the savings in a single pot.
How can I find out what pensions I have? How do I trace my pension?
Considering employers open pensions for all new employees, it’s no surprise some individuals don’t know how many pensions they have. According to 2022 data from the Pensions Policy Institute, the value of lost pension pots is £26.6 billion.
You can trace unclaimed pensions in several ways:
Trace former employers. They should provide the pension providers’ details.
If you know the details of the pension schemes, contact the providers directly.
The government’s Pension Tracing Service is also an option if you can’t find your former employer.
Traditional transfer processes take as long as six months. Electronic transfers have reduced consolidation completion times, so it could take less than a month.
What are the pension transfer rules?
The transfer process is unique to each type of pension based on the following:
Benefits – You can’t transfer certain benefits like death benefits or guaranteed annuity rates.
Fees – Keep an eye out for early exit fees and charges for specific transfers like moving from a defined benefit scheme to a defined contribution pension scheme.
Amount – How much you want to transfer will determine which rules apply to the transaction.
Type of transfer – You can transfer any type of pension as long as your provider allows it.
Stopped contributions – The savings still belong to you even if you stop contributing.
The transfer payment, or pension transfer value, refers to the cash you’re entitled to for transferring out your benefits scheme. It (pension transfer value) will become the pension fund value after the transfer.
Should I transfer my final salary pension?
Can I transfer my pension to another person?
Can I transfer a pension myself? Do I need financial advice to combine my pensions?
What is the best way to consolidate pensions?
People looking to consolidate their pensions have plenty of options to choose from:
Do it yourself (DIY): If you have all the details, open a Self Invested Personal Pension (SIPP) and combine the pensions. Investments like shares, funds, and investment trusts might grow your pot. You can use reputable investment platforms like Hargreaves Lansdown or AJ Bell.
Pension tracing services: Private pension providers like PensionBee will trace, transfer, and consolidate all your pension pots. They might even offer recommendations and pension market advice.
Pension Tracing Service: It’s a free, governmental service. The tool works even if your employer went out of business or you can’t trace them. All you need is details of your employer, the type of business they conducted, and when you belonged to the pension scheme.
Choosing the right pension provider for your consolidation
Before approving the pension consolidation, choose a provider based on the following:
Fees and charges: Opt for one that doesn’t charge exorbitant administrative fees and unreasonable exit fees.
Pension annuity rate: They should offer sensible interest rates beating inflationary trends.
Investment and pension options: Must have a wide range of investment and pension options on financial assets capable of earning your savings maximum returns.
Retirement goals: Ideal providers should have a scheme aligned to your retirement plan, helping you achieve your retirement goals.
Risk tolerance: A good provider will assess your situation and suggest a flexible retirement plan matching your risk tolerance, ensuring you don’t lose money when you need it the most.
Is combining your pensions right for you?
Whether consolidating your pensions is the best option depends on your specific situation.
For instance, you may want to combine your pensions into a single plan if your current provider offers unfavourable interest rates, charges unreasonable administration fees, and you won’t lose your benefits or suffer from punitive exit fees.
What to check before you combine your pensions
· Can I save money by combining pensions?
Each of your pension pots incurs administrative charges, so combining your pots might reduce the fees and save you money.
· Can I achieve better growth by merging pensions?
Different providers offer varied interest rates and have different charges. Consolidating your pension under a provider offering the best rates and lower costs means you will earn more.
· Is it more convenient to consolidate pensions?
All your pensions will be under one roof, so it’s easier to manage and predict your earnings than having it strewn between different providers with different management requirements. Having many pension funds increases the risk of losing track of some of them.
· Do I have a final salary pension?
A final salary scheme provides a guaranteed lifetime income. When you pass away, your spouse or partner may be eligible for some benefits. Confirm with your provider if you have a final salary pension and if you can consolidate one under the scheme.
· Does my scheme offer generous guaranteed annuity rates?
If your current scheme offers generous perks like guaranteed annuity rates, ensure you are not giving them up before transferring your pension.
· Are there any exit fees?
Find out if your current provider charges exit fees for moving your pension to a different provider, as these can be hefty.
Why should you consolidate?
You should consider pension consolidation for several reasons, including:
The most significant benefit of combining pensions is it streamlines management and lessens the possibility of losing your funds.
Britons lose over 1.6 million pension pots totaling £19.4 billion, or almost £13,000 per plan, according to the Association of British Insurers.
Having all your pension funds in one location reduces the likelihood of loss. Additionally, it makes it easier to determine whether or not you are on pace to retire comfortably.
Are there any reasons not to combine my pensions?
Consolidating your pension may not always be the best option as you could lose some benefits, incur huge fees, and it may not make financial sense, as discussed below:
Defined benefit pensions, or final salary pensions, guarantee a set amount each year for the rest of your life. This type of income also usually increases along with inflation. If you’re under the final salary pension, consolidating your pensions will mean losing this guarantee.
Pensions with guaranteed annuity rates – Stick with the provider since they will deliver a guaranteed fixed interest rate, even when economic turmoil drives interest rates lower.
Defined benefit pensions – You might lose guaranteed lifetime income, and the provider cushions you from inflation.
Pensions with guaranteed fund returns – Transferring from such a fund means missing out on a guaranteed amount from your investment and other perks like a guaranteed growth rate and higher tax-free cash lump upon retirement.
Old Company Pensions or Section 32 Plans that allow enhanced tax-free cash – Some company benefits built before April 2006 allow taking more than the 25% maximum allowable tax-free cash entitlement and withdrawing the benefits before age 55.
If a Section 32 member dies before exhausting their benefits, their dependants will receive a lump sum death benefit.
Pensions with large exit penalties – Most older pension schemes have hefty exit penalties, which will take a huge chunk of your benefits. However, exiting at age 55 will only incur a maximum exit fee of 1%, so it’s best to transfer at an appropriate time.
Ongoing employer contributions – Unless your employer agrees to contribute to the new scheme, it does not make financial sense to go ahead with the consolidation and leave money on the table.
Pros and cons of pension consolidation
- A centralised place to track the performance of your investment.
- There’s a potential for higher earnings if you move from a lower to a higher rate or one with higher costs to lower charges.
- Easier to manage the fund if they are in a single place. You’ll encounter less paperwork and easier withdrawals.
- Improves the accuracy of forecasting retirement income.
- You might lose some perks like guaranteed lifetime income and death benefits for your dependents.
- Some transfers might incur a hefty tax bill.
- Keeping smaller funds (under £10,000) might be more tax efficient than a larger pot. You’re allowed up to three pots for the 25% tax-free relief without counting toward the lifetime allowance, while a bigger lump sum might push you to a higher tax bracket.
- Placing all your funds in a single pot robs you of the financial diversity which could even out the blows of a volatile market.
Combining different types of pension
If you want to consolidate your pensions into one, you can do so on your own or contact your pension provider.
Combining a defined benefit pension scheme
The retirement benefit you receive from a defined benefit pension scheme has its basis on your income and the duration of your contributions to the scheme. It includes final salary and career average revalued earnings schemes.
When combining a defined benefit pension system with other pensions, it’s essential to evaluate the compatibility of the benefits and provisions provided by each scheme, including retirement age and inflation protection mechanisms.
Combining a defined contribution pension scheme
Unlike a defined benefit scheme offering guaranteed income for life, the pension provider will only pay a certain amount under defined contribution pension schemes based on the amount you paid, your choices at retirement, and how much the investment grew.
Before you combine any of these schemes, be it an executive pension plan, group personal pension, SIPP account, or Small Self-Administered Scheme, consider each pension plan’s investment opportunities, costs, and maximum allowable contributions.
