Can I consolidate my pensions?
Yes, it is possible to consolidate your pensions. Pension consolidation is when you combine multiple pension policies so that they are held in one pot.
Depending on your goals and objectives, there are several reasons why you may consider consolidating your pensions, however it is not always suitable for everyone, and therefore it is important that you consider all options and seek advice where appropriate. Ease of management is typically viewed as the go to rationale for consolidation, however, there are a number of factors which you should consider.
What are the benefits of pension consolidation?
The main benefits of pensions consolidation include ease of management, flexibility, risk management and cost. We look at each of these in detail.
Ease of Management
In your working life, it is common to build up several pensions of varying sizes with different employers and providers, and keeping a track of multiple policies over the years can prove to be difficult.
Therefore, consolidating them into one pension pot means that your finances are simplified and easier to manage. This can be useful throughout your career to ensure that you maintain oversight of your pensions as you build up your wealth, however, this can also be particularly important as you approach retirement and need to fully understand your financial position before embarking on the next stage of your life.
Long gone are the days where you have to purchase an annuity at retirement with your pension funds. An annuity is a way of buying a guaranteed income for the rest of your life with the money in your pension pot. But in return for this guarantee, you effectively hand over your whole pension.
Instead of buying an annuity, these days, it has become increasingly popular to access your pension benefits flexibly, for example through flexi-access drawdown, whereby you have the option to draw an income from your pension as you see fit, perhaps in a much more tax-efficient manner.
However, not all pension policies offer this option and although new rules were introduced in 2015 under ‘Pension Freedoms’, many older style contracts have not been updated to reflect these new flexibilities. If it is suitable for you, pension consolidation can help you to transfer your older style pensions to a more modern contract to enable you to access your benefits in a flexible way that better suits your objectives. Of course, this does not rule out the possibility of buying an annuity in the future, should your circumstances or objectives change. With flexi-access drawdown you retain full control of your pension and can reconsider your options at any time.
Furthermore, consolidating your pensions into a more modern style contract often means that you will have a greater degree of flexibility with regards to the death benefits. For example, flexible death benefits enable your pension funds to pass on to your loved ones outside of your estate, for them to draw down as required, rather than your beneficiaries having to withdraw the pension as a lump sum or take an annuity.
Having your pensions under one roof may also make it easier to ensure that your pot is being managed with the correct level of risk that you are willing to take with your money, as your arrangements will be simplified, and you will have greater visibility of the underlying investments and the performance.
Many contracts are typically set up to invest you into a ‘default’ fund which may not reflect your investment needs. Furthermore, many older contracts restrict your investment options, and you may have only a handful of funds to choose from. Consolidating your benefits into a more modern style contract, such as a SIPP (Self Invested Personal Pension) for example, means that you should have access to a wider universe of funds and asset classes that may not be available via your current pension schemes. This broader investment selection can ensure that your pension is able to meet your long-term investment objectives.
It could be cheaper
Consolidating your pensions may mean that you are able to transfer away from some of the more expensive legacy plans and access a cheaper policy elsewhere. Sometimes, your pension provider may also offer a scaled charging structure, whereby the more that you have invested, the cheaper the cost. Therefore, it may be more cost effective to have them all in one place.
What are the cons of combining pensions?
Defined Benefit Schemes
Defined benefit, or final salary / career average pensions, are a very valuable asset for retirement, sometimes referred to as the gold-plated pension scheme. They provide a guaranteed income for life, which is often index linked so that your income payments can keep pace with inflation (up to certain limits) over your lifetime.
Consolidating these types of pensions requires high quality regulated financial advice and it is only suitable in certain circumstances, due to the risks involved in sacrificing guaranteed income. Transferring away from such schemes means that you may then be exposed to investment volatility, as well as the risk that you may deplete your pension pot too early and run out of money to fund your retirement.
Some pension policies offer other valuable benefits, such as attractive Guaranteed Annuity Rates, which you are unlikely to beat on the open market; guaranteed growth rates, which may require a high level of investment risk to match; or access to tax-free cash in excess of the standard 25%. Often these benefits would be lost on transfer and therefore it is important to speak to a financial adviser to consider your options.
Some policies will carry an exit penalty if you transfer away before your retirement date. It is therefore important to understand all of the charges involved in consolidating your pensions so that you can determine whether the benefits outweigh all costs.
How to go about consolidating your pensions
To consolidate your pensions into a single pot, you will need to start an application to transfer via the pension provider which you wish to use moving forwards. Often, with modern contracts, you can log in online to initiate a transfer, and all you will typically need is the name of your existing pension providers, the policy numbers, and approximate values.
This information is likely to be found on your annual pension statements, however of course, tracking down your pensions may be the first obstacle to overcome.
What to check before you combine your pensions
Before consolidating your pensions, it is important to ensure that you are not transferring away from a policy that is a ‘must hold’, and answering these simple questions about your existing scheme will help to establish whether it should be moved:
- With my current policy, can I access my pension benefits in a way that suits my objectives?
- Do the current death benefits work for me and my beneficiaries?
- Are there any guaranteed benefits that I should be aware of?
- What are the current charges on my pension, and are there any exit penalties that I should be aware of?
Unless you have a particular pension policy that is considered a ‘must hold’ based on some of the above-mentioned criteria, consolidating your pensions could ensure that you achieve your objectives and enable you to have a comfortable retirement in a simpler way.
If you’re looking to personalised advice on consolidating your pension pots, why not get in touch with one of our expert financial advisers. We’re offering anyone with £100,000 or more pensions, savings and investments a FREE retirement review worth £500.
Please note: Investment returns are not guaranteed and you may get back less than originally invested.