5 important factors to consider before consolidating your pensions

Category: News

Modern living can often mean busy living. So, simplifying your to-do list and reducing the amount of life admin you face may sound appealing.

Perhaps you feel the same about planning your retirement finances?

If you’ve worked for several employers throughout your career, there’s a good chance that your retirement savings and investments are spread between multiple pension pots. This could result in time-consuming admin, and it might be hard to keep track of how much money you have saved up.

Consolidating your pensions into a single pot might appear to be a neat solution. Indeed, PensionsAge has reported that three-quarters of savers would opt for a “pot for life” pension if they had the choice.

However, it might be helpful to consider the following five important factors before consolidating your pensions.

Read more: Pot for life pensions: Pros and cons of Jeremy Hunt’s new policy idea

1. You could reduce your pension costs

If you have a defined contribution (DC) or “money purchase” pension, your provider is likely to apply certain charges. The amount and type will typically vary from pension to pension. However, older pension schemes often come with higher charges.

Over time, these could make a significant difference to your returns and potentially result in a lower retirement income, which may affect your long-term financial plans.

So, understanding how much you’re paying for each pension, and working out whether you’ll pay less overall by consolidating your pots could help you decide if it’s a good idea.

2. You could deplete the value of your pension in the short term

While consolidating could potentially save you on fees and charges, you might incur penalties for transferring a pension from your current provider.

The amount you’re charged can vary between both providers and schemes.

Some providers may charge an “exit fee” to release your money. This is usually a percentage of your pension savings, which will be deducted from your balance when you make the transfer.

Exit fees are associated with pensions set up before 31 March 2017, when the Financial Conduct Authority (FCA) banned exit charges on pensions set up after this date. The FCA also capped exit fees at 1% of the value of a pension for those aged over 55 (57 from 2028) and providers are prohibited from increasing exit fees that are already less than 1%.

However, according to research published by Unbiased, 41% of people who accessed their pension between 2021 and 2022 incurred some kind of charge for doing so and the average exit fee was around 10% of the value of their pension pot.

Also, if you have a “with-profits” fund, your provider may apply a “market value reduction”, which is a deduction made on certain withdrawals or switches from a with-profits fund.

So, it’s important to consider whether the potential benefits of consolidating your fund outweigh the costs of transferring your pension elsewhere.

3. Monitoring a single pension may be easier

Monitoring multiple pensions can be time-consuming and complex. It may also increase the risk of “losing” a pension.

This typically happens if someone has changed employer several times throughout their career and fails to keep track of previous pensions.

Research published by Mercia has revealed that there is £26.6 billion in lost and unclaimed UK pensions and the average value of each pot is £9,500, rising to £16,004 for those aged between 55 and 75.

Conversely, it may be relatively easy to keep track of a single pension. It could also save you considerable time and effort.

Consulting a financial planner regularly could help you keep your retirement plans on track and give you options if you veer off course.

4. You might lose valuable benefits

If you have a defined benefit (DB) or “final salary” pension, it might come with special benefits and guarantees that you could lose if you choose to consolidate your pensions into one pot.

So, you may be wise to speak to a financial professional before doing so. In any case, if you’re transferring out of a DB scheme worth more than £30,000, the FCA requires you to take financial advice first.

Valuable guarantees you might not wish to forego include:

  • Guaranteed annuity rates
  • Guaranteed minimum pensions
  • The option to withdraw more than 25% tax-free.

In contrast, consolidation could allow you to gain greater flexibility in how you draw an income from your pension.

Flexi-access drawdown was introduced as an option for DC pensions from 6 April 2015. This gives you more flexibility over how and when you receive your pension benefits. Older schemes may not offer this.

So, by moving your funds to a newer scheme, you could have more control over your retirement income. However, you will have to be comfortable potentially giving up those aforementioned benefits from your previous scheme.

5. Consolidating could offer you a greater choice of investment funds

More modern pension schemes may offer a greater choice of investment funds than those you set up many years ago.

So, consolidating your pensions could allow you to choose an investment strategy that aligns with your long-term financial goals.

A financial planner can help you assess your current pensions and consider the relative pros and cons of consolidating them into a single pot.

Get in touch

If you’d like to learn more about consolidating your pensions, please contact us by email at info@lloydosullivan.co.uk or call 020 8941 9779 to see how we can help you.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Workplace pensions are regulated by The Pension Regulator.