GUIDE: Pension Consolidation

What is pension consolidation?

Many people amass several pensions over the course of a working life. Holding numerous pension schemes can pose a challenge in keeping track of how they are performing, and how much you’re paying in charges.

Pension consolidation is where you transfer several pensions into one scheme. By combining your pensions, you can often reduce how much you pay in charges and can more easily keep track of how your pension is performing. 

Pension consolidation can be particularly relevant if you’re coming to retirement soon. Many old pensions do not provide you with the necessary flexibly to withdraw money as you may wish to in retirement. Consolidating these into a modern contract can provide the necessary flexibility around how you access the pot at retirement.

Four benefits of pension consolidation

1. Much easier to review

Keeping track of several pensions is not straightforward – particularly when spread across different providers. By combining, you can keep track and see how they’re performing with less hassle. 

With one plan, you have full visibility over your money. For example, if you notice an issue, you can make changes quickly, without having to contact multiple pension providers. 

You will only have to interact with one pension company, saving on time and paperwork.

2. Reduce costs

If you have an older pension, there’s a good chance that you will be able to reduce your costs by consolidating. All things equal, the less you pay in charges the more you may have for retirement.

Some older-style pensions come with very high charges. These can erode your pension value over time, reducing how much is left for your retirement.

3. Potential for improved returns

How and where your pension is invested will determine how much it rises and falls in value. 

Many older pensions may provide access to only a few investment options whereas more modern pensions can provide access to thousands of different investments. 

By consolidating you can often increase the range of funds available to invest in. This gives you more choice and flexibility to choose an investment strategy that’s right for you.

4. More flexibility when it comes to retirement

It used to be the case that when you reached retirement, you had to use your pension to purchase an annuity. The rules changed in 2015, allowing people to flexibly withdraw an income from their pension pot.

Despite the rule change, many old pensions do not offer flexible drawdown. This is often because the pension was set up at a time when annuity purchase was the only option. Most people today flexibly withdraw an income from their pension, although this is not always suitable for everyone.

You may need to merge your old pensions into a newer pension if you want to take advantage of flexible drawdown. This is often a key reason why people consolidate their pensions when planning for retirement. 

Four reasons NOT to consolidate your pensions 

Although there are clear benefits to combining your old pension pots, it isn’t for everyone. There are some instances where you will be better off sticking with your current pension plans.

1. You have a final salary pension

If you have a final salary pension, then consolidating your pension isn’t likely to be the best thing to do. 

Final salary pensions, otherwise known as ‘defined benefit pensions’, provide a guaranteed income for life. What’s more, this income tends to rise with inflation. These are very valuable benefits that will be lost if you consolidate your pension.

Moreover, the pension will likely provide your spouse with an income for their lifetime.

2. You have valuable guarantees 

Some pensions come with valuable guarantees. These include guaranteed annuity rates, protected tax-free cash or guaranteed minimum pensions. These are known as safeguarded benefits and are typically lost if you consolidate your pension.

You should always check with your pension provider if safeguarded benefits apply before making any changes.

3. Your pension receives employer-matched contributions

If you’re an employee, it is likely that you and your employer both pay into your workplace pension. Typically, your employer will match your pension contributions up to a certain level.

If this is the case, then you don’t want to transfer this pension to another pension – as you may lose the employer-matched contribution. 

You may be able to combine other pensions with this pension, however. You should check with your workplace pension provider to see if they will allow you to transfer in other pensions.

4. You will pay an exit fee when transferring away

Some pensions will charge you an exit fee if you decide to transfer away. The exact amount and the terms under which a fee applies will vary between pension providers.

This can reduce the benefit of consolidating your pensions, even if there is a cost-saving to doing so. You will need to compare the exit fee payable with the annual cost saving to determine if this makes sense. 

Things to check before consolidating your pensions

Before combining your pensions together, you will want to check that you are not going to be worse-off. The below summarises the key things you should check before consolidating your pensions:

This is not an exhaustive list but covers the key points. You will need to weigh up the benefits and costs of consolidating your pensions to determine if it’s the right thing for you. 

If you would like some help, please get in touch.

We have the qualifications, credentials, and experience to guide you through your options and advise you on the most suitable course of action.

How to consolidate your pensions?

If you’re looking to combine your pensions together, you can often do this yourself. To get started, you will need to contact your current pension providers and obtain a transfer quote. This will tell you the value of your pension for transfer and include any exit penalties. 

You will then need to contact your new pension provider and request for them to transfer over your old pension. They will typically have a form that can either be completed online, over the phone or by post. 

The new pension company will then contact your old pension company, requesting that they consolidate your old pension into your new one. This typically takes between four to eight weeks.

Alternatively, you can work with an independent financial adviser who will be able to arrange this for you. Before consolidating your pension, they will provide a full review of each of your pensions, making sure that pension consolidation is the right thing to do for you. They will then complete the paperwork for you. 

If you would like advice around pension consolidation, please contact us.

Is pension consolidation right for you?

Unfortunately, there’s no one-size-fits-all when it comes to pension consolidation. What’s right for one person isn’t right for another. Whether to combine your pensions will depend on the type of pensions you have and your personal circumstances. 

If you’re looking to do it yourself, you should check to make sure that you’re not giving up any valuable benefits, and that your new pension is demonstrably better than your old pension. If you work with an independent financial adviser, they will complete this analysis for you. They will review your pension arrangements and advise you on the most suitable course of action

Next step

Please get in touch and we will be happy to assist.

Barra Gorman FPFS

Chartered Financial Planner

hello@foursquarefm.com

02895 909717

The value of pensions can fall as well as rise.