The idea of the ‘job for life’ is long gone and it’s now common to have several jobs throughout your career.
That means people go through their working lives building pension pots in different defined contribution workplace schemes with different employers, especially since the introduction of auto-enrolment.
This can mean you have ‘stranded’ pension pots in various different employers’ schemes that you may not be sure what to do with.
This guide includes information on consolidating pension funds if you have multiple pension pots from multiple employers and the potential benefits from doing so.
One of the biggest reasons for consolidating your pensions is because it’s generally easier to keep track of fewer pots.
Doing so often means you engage in a review of all your separate plans at the same time, which will allow you to see:
There will be charges on each individual pension plan, including potentially inactivity fees for pensions you’re no longer paying into, so rather than paying several sets of charges it might be beneficial to pay just one or two and reduce what you’re being charged on your pension.
One option for combining several defined contribution pension pots is to transfer them all into a single fund.
While it may seem easier to manage to have all of your retirement savings in one place, whether or not this is right for you depends on the types of pensions you have and the length of time before retirement. You should also consider what your pensions are worth before shifting them into one fund.
Combining your pension arrangements into one fund also means all your retirement eggs are in one basket — if that fund performs poorly, then you could lose out.
However, if you have several poorly-performing funds with high management charges and you have some time before retirement, amalgamating and transferring these pension assets could make a significant difference to the growth rate of your pension pot in the long run.
If you’ve changed jobs, you can leave your pension pot invested with your old employer’s scheme if you wish. It could continue to grow in terms of investment returns depending on its performance, but you most likely won’t be able to continue to invest in it.
You might also be able to transfer your pot to your new employer’s scheme, providing your old scheme allows this and your new scheme will permit the transfer.
However, doing so could incur a transfer fee and you could lose any rights you had under your old scheme, such as the right to take your pension at a certain age. There may also be termination penalties on your old pension and other adverse effects.
Check whether your old scheme provides benefits that your new one doesn’t, such as guaranteed annuities or a spouse’s pension. These are valuable and you should check how much they are worth before you decide to move your pension.
Make sure you understand the consequences of swapping schemes from an old employer to your new job, or get a pensions adviser to look it over and discuss whether this is the right thing for you.
When you leave a job, you can also take your pension pot and move it into a private pension plan, such as a stakeholder pension or a self-invested personal pension (SIPP).
You won’t get any contributions into this from either your old employer or your new employer, however.
An advantage of transferring your workplace pension to a private pension is that you could get more control over how the fund is invested, especially if you opt for a SIPP.
It’s always best to consider getting advice if you’re thinking about doing transferring your workplace pension to a private pension plan.
There are a number of factors you should take into consideration before consolidating your pensions, including the fact that it may not always be the best idea to do so.
Some pensions could be better off left where they are, such as those with attached guarantees (e.g. a guaranteed annuity rate).
Other times, such as with a final salary pension, it may not make sense to bring it in with the rest of your pension savings all in one pot.
It is very important to be clear about the financial implications of moving your fund. You may face a number of charges for doing so, including:
Your previous employer may also try to persuade you to leave the fund by giving you an enhanced transfer value — a bonus on the actual value of the fund. However, this might not be a true equivalent to the benefits you are giving up, which could see you lose out.
That’s why you should make sure you understand your options before you make any moves to transfer pensions, and why getting financial advice on pension consolidation could be of incredible value to ensure you don’t fall foul of these fees or get short-changed.
Before you move, look at how the funds your pension money is invested in have performed. If they are performing poorly or are in closed funds no longer open to new members, then it may be time to leave in search of better growth.
Some pension funds automatically switch your investments from equities (shares) into fixed interest rate products such as bonds and gilts over the 10 years before your chosen retirement date.
However, if you are planning to leave most of your fund fully invested, then the potential growth will be affected if you’re in more cautious investments. It might be worth reviewing these and discussing your options with an adviser to make sure the funds are invested in the right place to match your needs.
The 2015 pension freedoms offered a wider array of options for those looking to access their pension pots and make retirement provisions.
This includes opening up the option of pension drawdown (or income drawdown) to more people with defined contribution pensions.
However, not all funds allow drawdown and you might have to move to a new fund that does if you want to consider this as an option for providing retirement income.
As with all long-term decisions affecting your pension, it’s best to get financial advice on income drawdown to see if it’s suited to you. You need to be aware that if you take too much of your pension too early and / or live longer than you were expecting, you could run out of cash.
Defined contribution pensions are the most common type of pension in the UK. These are pots of money you save into throughout your working life, with the amount in your pension at retirement defined by those contributions you’ve made.
Auto-enrolment means that all companies have to provide eligible employees with at least a defined contribution pension pot and pay in alongside the member, unless the member chooses to opt out.
Defined contribution pensions are fairly easy to consolidate if it’s the right option for you to do so.
The other type of pension that’s less common in the UK is a defined benefit pension. With these, the benefit is defined at retirement based on your salary and length of service.
If it’s based on your salary at retirement, it’s known as a final salary scheme. If it’s based on an average of your salary across your time with the company, it’s known as a career average pension.
Defined benefit schemes provide a guaranteed income for the rest of your life, and usually for your spouse as well.
As such, if you have a defined benefit or final salary scheme, consolidating your pensions probably won’t make sense. It will generally be better to leave a final salary pension where it is because of how generous these schemes are and the fact that they’ll provide you with a guaranteed retirement income.
If the value of your defined benefit pension(s) is over £30,000, you’ll need to get pensions advice before looking to move your final salary pension. Consolidating a final salary pension is more complicated and requires specialist advice.
Note that you won’t be able to transfer your final salary pension if you’re in an unfunded public sector scheme, which means the pension benefit is paid directly by the government at retirement. Such defined benefit schemes include those for teachers, the police and the NHS.
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