Planning for retirement can be a decades-long journey marked by numerous job changes. Each new role can come with a new pension policy, often creating a complex web of retirement investments and charges.
Consolidating your pensions into one streamlined fund can be an enticing idea, offering simplicity and potentially better returns. But pension consolidation is not a one-size-fits-all solution: it has its own set of considerations.
Pension consolidation involves combining multiple pension pots into a single plan. The aim of consolidation is often to reduce administrative hassle, bring down fees and gain better oversight of retirement savings.
Consolidation may simply involve identifying a pension provider that suits your needs and instructing it to carry out the consolidation for you. But people with personal pensions or defined benefit schemes, for example, may find consolidation much more complex. Defined benefit pension income is based on your salary and the number of years you contributed to the scheme rather than the value of a pensions savings pot.
Pension consolidation won’t suit everyone: for many of us, the disadvantages of consolidation could outweigh the advantages. Factors such as exit fees or the loss of valuable benefits on your pension may mean it isn’t the best financial option for you.
The following list of pros and cons is not exhaustive. But it can help you evaluate whether consolidation might be worth considering.
Pros of pension consolidation
Potential cost benefits. Each pension provider has its own charges and, over time, the amount you pay across multiple pots may become significant. Pension consolidation can cut down the total amount you pay in charges, potentially leading to greater long-term savings.
Easier tracking of savings. Managing multiple pensions can be complex and time consuming. Consolidation lets you monitor and manage your retirement savings with one provider, making it easier to track progress toward your retirement goals.
Avoiding pensions loss. Having many pensions could increase the risk of losing access to them. A 2013 policy paper from the Department of Work and Pensions estimated that 50 million pension pots would become lost or dormant by 2050 (1). Pension consolidation reduces the administrative burden that comes with managing several accounts, making it less likely you’ll lose track of a portion of your savings.
Improved investment control. It’s important to ensure your pensions match your personal attitude to investing, which can be hard to achieve if your savings are spread across several providers. Pension consolidation offers a clearer view of your portfolio, making it easier to assess whether it meets your needs.
Flexible retirement options. Since 2015, retirees have had the option to withdraw income from their pension flexibly over time via income drawdown. But some older pensions don’t offer this option and consolidation with a newer provider may allow you to take advantage of this flexibility.
Cons of pension consolidation
Costly exit fees. Some pension providers charge an exit fee if you decide to transfer away, with varying costs and terms. In some cases, the exit fee may be large enough to outweigh the benefits of consolidation.
You may lose valuable benefits. Some pensions offer defined benefits, also known as safeguarded benefits, such as guaranteed annuity rates, protected tax-free cash or guaranteed minimum pensions. These benefits can be highly valuable and will be lost if you consolidate with another provider.
You may lose employer-matched contributions. If you’re still an employee and you have a defined contribution pension, it’s likely your employer matches your pension contributions up to a certain level. In a defined contribution pension, the amount of retirement funds built up depends on how much you and your employer contributed and how these pension investments performed. Consolidating your pensions with a provider other than your workplace scheme often means you lose your employer contribution.
Partial consolidation: a flexible option
You may want to consider consolidating some of your pensions with a single provider while leaving others separate. Such partial consolidation may be appropriate if you wish to consolidate pensions that don’t match your needs while retaining certain benefits or investment strategies from others.
Whether and how pension consolidation might work for you depends on your circ*mstances. A financial adviser can help you devise a suitable arrangement. At Schroders Personal Wealth one of our key principles is to have regular reviews with an adviser. This can help ensure you make the best use of your pension savings.
Source:
(1) Gov.uk, ‘Automatic transfers: consolidating pension savings’, 10 May 2013.
