How consolidating your pensions can be a valuable step towards your retirement goals

Category: News

Pension Awareness Day (15 September) and National Pension Tracing Day (13 October) are two dates you’ll find at the start of the autumn calendar that are meant to bring awareness to retirement issues.

They are a helpful reminder to check in on your pension and make sure you’re still on track to meet your long-term lifestyle and retirement goals.

If you’re entering the autumn of your life, it might be advisable to consider steps to maximise your retirement savings and ensure you’re not missing out on any potential benefits.

The FTAdviser reports that the “sandwich generation” of workers between 45 and 54 years old is facing a prospective pension shortfall of £370,000 on average. Meanwhile, a study by Unbiased shows that one in six Britons aged 55 and over have no pension savings set aside beyond their State Pension.

A partial solution for these looming pension issues could lie in missing workplace pensions. PensionsAge reports that £37 billion across 1.6 million UK savers is currently languishing in dormant or lost accounts.

Read on to learn how to track lost or dormant private pensions as well as the benefits and drawbacks of consolidating your various accounts.

Tracking down lost pension accounts could potentially give you a savings boost

According to MoneyAge, 28% of Britons have built up three or more pension pots throughout their careers. This leaves plenty of opportunities for savers to lose track of workplace pension schemes between the start of their working life and the time they approach retirement.

As previously mentioned, 1.6 million savers currently have lost or dormant accounts with an average of approximately £23,000 for each saver.

Locating any lost funds could provide an immediate boost to your pension pot, especially as your accounts are likely to have been accruing “compound interest” gains over time.

If you believe you might have lost a workplace pension pot at some point during your career, then your first step should be to use the government’s tracing service to help locate it.

Consolidating your pension pots could save you time and money

Once you’ve located any lost accounts, consider consolidating them into a single pot.

The simplest benefit of this step is it frees up time and makes managing your pension more convenient as you’ll only have to deal with a single provider.

Older schemes can have higher charges that could lead to you missing out on significant savings. According to a report from Interactive Investor, older schemes can have percentage-based fees of 0.75% or more.

The report goes on to outline how a saver with £150,000 in a pot could save £20,000 by moving from an old account with high percentage fees to a modern account with either tiered percentages or flat fees.

The compounding effect on those fee savings could mean that your investment significantly grows over time, potentially boosting your pot by around £60,000 after 20 years.

Another benefit of consolidating your pension pots is reducing associated charges. Multiple accounts mean multiple charges while having a single pot will mean having to deal with a single charge.

Finally, consolidating under a single scheme could give you greater control over the way your pension is invested.

A study by Aviva found that an increasing amount of UK savers consider the ethical consequences of their investments to be important. Over two-thirds believe that environmental, social and governance (ESG) factors are a vital consideration when it comes to investing.

Consolidating your pension pots allows you to re-evaluate the state of your savings and could help to ensure your pension investments are in line with your personal beliefs.

Merging your pension pots has potential drawbacks

Deciding to consolidate your pots could see you lose out on benefits attached to older plans, especially any defined benefits (DB) schemes you hold.

DB pension schemes are sometimes called “final salary” schemes. They work by paying out a guaranteed income based on your earnings when you retire.

DB pensions put the associated pension investment risk on the scheme and not the individual. They can also have added advantages such as large lump sums (above the usual 25% tax-free entitlement) or more favourable death benefits.

Transferring your funds can be costly as there can be associated charges, as well as exit penalties tied into old agreements.

Creating a larger, consolidated pot could have damaging tax implications for your pension. You might be pushed into a higher income tax bracket or miss out on the tax efficiency of smaller pots.

For example, three pots (each under £10,000) can be taken as a 25% tax-free one-off lump sum without counting towards your Lifetime Allowance (LTA).

Finally, having multiple funds means your investments are more diversified and leaves you with better protection from the effects of any drops in the marketplace.

It is important to weigh up the pros and cons of consolidating your pension pots before making any decisions. The best course of action will depend on your personal circumstances and your long-term goals.

Get in touch

If you’d like help with locating potentially lost workplace pension pots, as well as deciding if consolidating your accounts is the right step for you, then please get in touch.

Email or call 020 8941 9779.

Please note:

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

Workplace pensions are regulated by The Pension Regulator.