Guide to Pension Consolidation
Combining multiple pensions into one easy-to-manage pot can help you stay on top of your retirement savings. Read our guide on pension consolidation to learn more about the benefits and use cases.Speak to a specialist
“Don’t put all of your eggs in one basket.”
If you speak to any financial adviser worth their salt, this is likely what they will tell you. And for good reason.
Building a diverse retirement portfolio can help you balance risk and reward. It helps to reduce the impact of potential losses while producing positive investment returns.
But when it comes to your pension pots, sometimes, less is more. In other words, having all of your proverbial eggs in one basket sometimes pays.
In this article, we explore pension consolidation, including the benefits and why it’s more important than ever to consider.
In this article
What is pension consolidation?
Pension consolidation is the process of combining all or some of your existing pensions into one pot.
Think of it as a way of organising and decluttering your existing pension plans.
Having all of your pensions under one roof can provide several benefits, such as making them easier to manage and simplifying the retirement planning process.
Why is pension consolidation more relevant than ever?
There are no limits to the number of pensions you can have. In fact, it’s more common than ever for people to hold multiple pensions.
The modern job market is dynamic and fast-moving. Simply put, people are changing jobs more frequently than in the past.
Research by LV= found that workers change jobs every five years on average. Meanwhile, separate data from the UK government’s Pension Tracing Service revealed that people had 11 jobs, on average, throughout their working lives.
As we change jobs, we accumulate more workplace pensions. These workplace pension schemes can often become scattered, making them hard to manage or, worse still, lost altogether.
Data from the Association of British Insurers (ABI) estimates that almost three million pension pots worth a total of £26.6 billion have been lost.
What are the benefits of pension consolidation?
Some of the key benefits of combining your pensions into one pot include:
- Easier to track and manage
Wider investment choices
- Reducing fees and costs
- Greater flexibility
Let’s look at each of these in more detail.
How does merging my pensions make them easier to track and manage?
To manage your pension effectively, it needs a regular review. This means ensuring that your current investment choices align with your risk profile and goals and monitoring the growth and performance of the fund.
Consolidating your retirement pots can make life a lot easier. After all, it’s much more straightforward to manage one pension than it is to look after multiple.
Having one pension pot also means less paperwork to keep track of and less hassle if you need to change information with your current provider.
Does merging your pension give you more investment choices?
Many pension schemes offer a limited range of investment options. However, combining them into a single scheme could give you more choice and control over your pension investments.
Transferring to a self-invested personal pension (SIPP) could give you access to an even wider choice of investment funds. SIPPs offer a much more comprehensive selection of investment options than other pension types.
Having all of your pensions in one place could also increase investment performance and the overall value of your pension savings.
Can combining pensions into one pot reduce fees and costs?
Each pension has its own management fees and charges.
And while you may no longer be making pension contributions to the fund, the scheme administrator will continue to charge you for managing the fund. However, there are some potential cost savings benefits if you combine multiple pensions into one pension fund.
Having all your pensions in one pot and paying a single fee may help reduce the administration charges you are currently paying.
You should contact the pension provider to check the charges for a given fund. Alternatively, you can look at your pension statements to see any charges.
Will consolidating my pensions provide more flexibility over my retirement savings?
Pension rules have changed in recent years. Different types of pension plans now offer more freedom and flexibility over how people access their retirement income.
With a newer type of pension scheme, you often have access to options like flexible drawdown, something that older plans do not offer.
Check with your current pension provider for more information on accessing your pension and available options.
Things to be aware of before consolidating your pensions
Before you begin the transfer process, there are some questions you should ask yourself. These include:
Are you giving up final salary pension benefits?
Final salary pensions are also known as defined benefit (DB) pensions and are different from defined contribution pensions.
Defined benefit pension schemes provide a guaranteed income for life. Transferring one of these could result in losing out on some of the scheme’s valuable benefits. However, there are situations where transferring a DB pension may be beneficial.
For defined benefit pension transfers of £30,000 or more, you are required to seek advice from an FCA-regulated financial adviser by law. The adviser must have permission for the activity of ‘advising on pension transfers and pension opt-outs’.
Will you give up perks such as guaranteed annuity rates?
Some schemes offer safeguarded benefits, such as annuity rate guarantees.
An annuity provides a regular income at retirement. With a guaranteed annuity rate (GAR), you can secure a much higher annual income than you would typically get.
You may lose that perk when you transfer a pension with a GAR. If you are unsure, speak to an expert who can advise you based on your situation.
Are there any transfer or exit penalties?
Pension providers may charge a fee for leaving or transferring your retirement pot. It’s important to know what charges and fees apply, as these can eat into your pension savings.
How to consolidate your pensions
Before consolidating your pensions, you will first need to track down any old or lost schemes. The UK government’s service page allows you to search for lost pensions.
You will then need to inform your new or current pension provider that you want to consolidate your pensions.
There are various options and pension products to merge your retirement funds. Some of these include:
- A self-invested personal pension (SIPP)
- A qualifying recognised overseas pension scheme (QROPS)
- A qualifying Non-UK Pension Scheme (QNUPS)
- Stakeholder Pension Schemes
Speaking to a retirement specialist can help you establish the best option or method based on your needs.
Find out if pension consolidation is the right option for you
Whether you should consolidate your pensions or not will depend on several factors. That’s why seeking professional advice is essential to determine if it’s the right option for you.
At Holborn Assets, our goal is to help you reach yours. We provide independent, expert financial advice tailored to your individual circumstances.
One of our pension specialists will help you understand all of your pension options so that you can make an informed decision about your future.
Whatever your retirement goals, start planning your future with Holborn Assets. Book a free, no-obligation meeting today and learn how we can help you.