Pension consolidation is the process of merging your pensions into fewer pots.
It’s become more common to have multiple pensions because employee tenure is falling, which means we’re all having more jobs throughout our working lives. This comes as auto-enrolment automatically makes employees members of their employers’ pension schemes.
As a result, we’re all now likely to accumulate multiple pension pots from different places, including any personal or private pension arrangements on top of workplace pensions from old employers.
While there are certainly benefits to using a pensions consolidation service to reduce the number of pension pots you have, pension consolidation might not be right for everyone. With certain pension plans, the costs of a pension merger may outweigh any benefits.
This is particularly true if you’re considering consolidating final salary pensions or other pensions with a guaranteed element.
Nor is pension consolidation about merging all of your pensions into one place — in many cases, it’s likely to be beneficial to have more than one pension fund, just not too many!
If your only reason for consolidating your pensions is to find lost pension pots, then you should be aware that the government offers a free pension tracing service to help you do just this.
Some pensions are easier to consolidate than others. Most money purchase or defined contribution pensions are fairly straightforward to consolidate (with certain exceptions). However, some pensions are trickier to consolidate, so it’s important you understand which pensions can be consolidated and which can’t be.
This includes knowing which pensions may be better off not being consolidated and remaining where they are, perhaps because there are certain benefits attached to the pension that you’re unlikely to be able to replicate if you move to another scheme.
Defined contribution pensions are generally the easiest to move around and consolidate if that’s appropriate for your circumstances — it’s best to always check with an adviser first before embarking on such a process.
However, not every defined contribution pension you hold can easily be consolidated, and some may be better staying where they are. Typically schemes which should be reviewed with caution include hybrid pension schemes and pension funds with guarantees, such as a guaranteed annuity rates (GAR).
Adviser Tip: One area where people often make a mistake is to think it’s best to merge a small pension into a big pension, simply because the smaller pension has less cash in it. In reality, the paperwork to transfer one to the other is generally very similar regardless of the size of each fund. And if the smaller fund has better terms than the larger one, you may actually be better off shifting your cash from the larger pot to the smaller one depending on your circumstances.
There are only so many pension providers on the market. As such, it’s entirely possible that over your working life you will be a member of more than one workplace pension scheme with the same pension provider, just under the name of a different employer.
These are often converted to personal pensions when you leave that job and thus the employer’s pension scheme.
The result can be that you end up with several personal pensions under the same provider, all of which may be imposing different charges and management fees.
In this case, because the pension pots are all with the same provider, they’re relatively easy to merge into each other with a minimum of paperwork.
With a final salary pension, you receive a guaranteed income for the rest of your life from your pension scheme. This is generally linked to either your final salary or an average of your earnings across your career and will be indexed to keep up with inflation across your life.
Giving this up is a big decision and is unlikely to be right for most people.
Moreover, in most cases, the benefits of consolidating defined contribution pensions don’t necessarily apply to final salary schemes.
For example, you’re not responsible for the investment risk in a final salary scheme because oversight and management of your investments is all taken care of by your employer’s pension fund. Also, given that your benefit is ‘defined’ by the very nature of these plans, you’re far less likely to face an unexpected retirement shortfall.
When people think of consolidating a final salary pension, they’re usually thinking of transferring out of your defined benefit pension into a defined contribution pension, which is strictly regulated. You’ll need financial advice to do it if your pension is worth more than £30,000.
If your sole aim is to rationalise your pension savings, it’s unlikely to be best for you to consolidate your final salary pension into a defined contribution pension.
There are some people for whom a final salary pension transfer might be appropriate. There are a number of factors to decide this, but one of them could be how generous the transfer offer is.
You can benchmark your pension transfer value against the industry with our Defined Benefit Pension Transfer Calculator here →
A hybrid pension scheme contains elements of both defined contribution and defined benefit pension schemes.
Some hybrid pensions see members accruing both kinds of benefit simultaneously and, at retirement, receiving a set proportion of their pension as defined benefit and the remaining proportion as defined contribution.
Other hybrid pension plans, known as sequential hybrid schemes, see members building up one kind of entitlement first, followed by the other at a set age.
So for example, a member might build up defined contribution benefits until age 40, after which they stop contributing to the defined contribution element and start contributing to a defined benefit element. They then receive both elements at retirement.
As hybrid pensions contain some element of final salary benefit, the same general rule of thumb applies when considering whether or not to consolidate hybrid pension schemes: Namely, they’re most commonly better off left where they are.
Some old private pension plans included guaranteed returns, either in the form of a fund value or pension amount. These would be lost if the fund was transferred out, and you’re unlikely to get such preferential terms in today’s pensions market.
If your pension has an attached guaranteed annuity rate (GAR), it means you could be entitled to a higher level of pension income if you purchase your annuity from your provider than if you buy an annuity in the open market.
Again, this promise will likely be broken by you transferring out of your pension.
In both cases, moving, transferring or merging older-style pensions with guaranteed annuity rates and / or guaranteed returns is unlikely to be beneficial, although a financial adviser can help you examine this to be certain.
Sales of pensions with GARs peaked during the 1980s when annuity rates were higher than today. If you have a pension with an attached GAR, usually sticking with your pension provider when buying an annuity will leave you better off. However, it’s always worth shopping around before buying an annuity, especially if you’re in poor health and think you might qualify for an enhanced annuity or want to leave a widow’s pension for your spouse.
With-profits pension funds are mixed asset funds with an element of security. However, in recent times the asset allocation of these funds is probably more cautious than when the policy was implemented.
The difficulty with consolidating old with-profit policies is that they often contain guaranteed annuity rates or offered a guaranteed return, so care should be taken before transferring out — even if the recent performance has been nil.
An exit fee is the charge a pension provider might levy for leaving your pension plan. It’s usually expressed as a percentage of your total pot.
Some pension providers might charge a higher fee than others. If an exit fee is particularly high with one provider, it may cancel out much of the justification for consolidating the pension in the first place.
Ultimately, it’s always best to get pensions advice if you’re thinking of consolidating your pensions.
A financial adviser is well-placed to discuss the process with you and help you decide whether a pensions merger is appropriate for you.
This is especially the case if you’re thinking of using pension consolidation for final salary pensions or hybrid pensions, as these are likely to require some element of final salary pension transfer.
This is a complex process and is unlikely to be right for most people, especially if your sole aim is simply to have fewer pension pots.
If you’re looking for an advice service to consolidate pensions we are here to help. Just as with most areas of life, there are pros and cons to pension consolidation, and it make sense to discuss the merging of existing arrangements with an expert pensions adviser. That way, you can ensure you’re doing the best thing for your future retirement income.
It is so important to keep a check of how you are going to fund your retirement. Without regular reviews and consolidation it can get out of control very quickly.
With the complexity that comes with reviewing existing pension arrangements it is so important to get professional advice to ensure you are making informed decisions about your financial future.
A good financial plan can help you make the right decisions when it comes to your finances. Make the right decisions today to build a more prosperous future.
Good financial planning with clear goals can increase your retirement income by as much as 53%. Old Mutual Redefining Retirement Survey
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