Can I Consolidate My Pensions?
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.
Can I Consolidate My Defined Contribution Pension(s)?
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.
Merging Workplace Pensions from Previous Employers
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.
Can I Consolidate My Final Salary Pension?
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 →
Combining Hybrid Pension Schemes
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.
Combining Pensions with Guarantees
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.
History of GARs
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.
Merging With-Profits Pension Funds
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.