Should I consolidate my pensions? Here are the important pros and cons

Category: News

When it comes to how you manage your pensions, both before and during retirement, there are a wide array of options to choose from.

The days of a “job for life” are mostly behind us, and with increased career mobility comes the likelihood that you may have more than one pension pot. Indeed, recent research published by PensionsAge has found that two-thirds of UK workers have more than one pension fund, while approximately 15% have four or more.

If you have multiple pensions, you could be considering consolidating them into one pot. This is a decision that should be weighed carefully, as consolidating could have a significant effect on your wealth in the long term.

Here are some pros and cons of consolidation, so you can better understand whether this is the right move for you.

The pros of pension consolidation

  • All your pensions are in one place

Your retirement fund should bring you peace of mind, not stress. By consolidating your pensions into one fund, you could relieve financial worries by knowing that your savings are all in one place.

By keeping your savings altogether, you can more easily assess how much you have to retire, and better manage your pensions going forward.

  • You only have one set of paperwork, and one provider, to deal with

From an administrative and organisational perspective, pension consolidation could be a great choice.

Having only one provider to communicate with, and one set of paperwork to find and keep track of, should simplify your financial admin. The time saved could be hugely beneficial as you approach your retirement.

  • There is the possibility of consolidating into the scheme with the lowest charges or best performance

Although there is no guarantee of positive returns in any investment, monitoring the performance of your pension pots is always a good plan. It might allow you to consolidate into the scheme you deem likely to offer the best long-term returns.

You should note, though, that past performance is no guarantee of future success.

Consolidation could also help to reduce your charges overall, particularly when it comes to older pensions. Consolidating into the scheme with the lowest fees could reduce your charges overall, leaving you with more in your pot for when you retire.

Working with a financial planner can help you decide on the right scheme for you. If you are considering consolidating your pensions, get in touch with us to see how our team of finance professionals can help.

The cons of pension consolidation

  • Consolidation can incur potential transfer charges

Transferring your pension funds into one pot can incur charges.

According to findings from the Financial Conduct Authority (FCA), published by the UK Care Guide, the average pension transfer cost is 2 to 3% of the fund’s value.

So, transferring your pensions could decrease the overall value of your fund in the short term – an aspect that needs to be factored in when you are considering consolidation.

  • Taking a larger pot in one go might mean more tax to pay

When it comes to drawing your pension, having a larger pot can mean an increased tax liability if you draw your pension in one go.

Any income you take from your pension – that is, outside of your tax-free cash entitlement – is subject to Income Tax. If you opt to take a large pension pot as a one-off lump sum, you could push yourself into a higher tax band, meaning part of your pension fund could be taxed at 40% or more.

There are ways to draw your pension without subjecting your savings to Income Tax – it may be a question of drawing a smaller chunk of the pot each tax year, rather than taking it all at once.

Discuss your drawdown options with us before you decide to consolidate and we can help decide if it’s the right option for you. We can also help to ensure that you draw your pension income sustainably, no matter the size of the fund.

  • Transferring a defined benefit (DB) pension may not be a beneficial choice

If you have a defined benefit (DB) pension, transferring it to a defined contribution (DC) scheme can mean you sacrifice key perks that a DB scheme provides.

For this reason, it is important to make careful considerations before transferring a DB pension.

By transferring your DB pension into a DC scheme, you could give up key protections, including:

  • Your guaranteed lifetime income
  • Your dependants’ lifetime income
  • Inflation protection, if your DB scheme provides it
  • Your pension being safely managed by your former employer and trustees.

There can be benefits of transferring a DB pension, such as the potential to see positive returns on your investment. Nevertheless, be sure to discuss a potential DB pension transfer with us before you decide.

Get in touch

If you are considering consolidating your pensions into one pot, consulting a professional is vital. We can assess your current pension funds and help you make an informed decision that fits your unique circumstances.

Email or call 020 8941 9779 to see how we can help you.

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.