Last month, you may have read our blog featuring five important pension facts to know for Pension Awareness Week.
In it, we explained how it’s possible for you to hold multiple pensions at the same time or consolidate them under one scheme.
Consolidating your pensions under one roof can be an attractive prospect for several reasons. However, there are also some notable disadvantages of doing so that you should be aware of before you make any changes.
So, read these three pros and three cons of consolidating your pensions under a single scheme before you retire.
3 pros of consolidating your pensions
1. It may make it easier to manage your fund in retirement
Keeping your finances simple and manageable is likely to save you considerable time. As the old adage goes – time is money.
The decision to merge your pension pots could free up valuable time as you will only have to deal with a single provider. This can allow you to potentially make better use of your Annual Allowance or Lifetime Allowance (LTA), as well as keep a closer eye on your pension’s investment performance.
It also means, when it comes to drawing from your pension during retirement, you will only have to do so from a single pot.
When you’ve finally reached retirement and are at the point in your life where you can enjoy the lifestyle you’ve been building towards over your career, the last thing you want to be doing is dealing with unnecessary stress and administration relating to your pension.
Consolidating your pension can help you to avoid these additional burdens.
2. You may be less likely to lose track of any of your pots
According to MoneyAge, 28% of Britons have, over the course of their careers, saved money across three or more pension pots. This greatly increases the likelihood that savers will lose track of their old pension schemes.
Research also shows that a great deal of money may be lost in these pots. Indeed, PensionsAge reports that there is £37 billion across 1.6 million savers in lost or dormant pensions – that’s more than £23,000 each.
Consolidating your pensions will reduce the possibility of losing track of your existing pots by holding them under a single scheme instead.
If you have already lost a fund, locating it could provide you with an immediate boost to the value of your pension. The gains could be considerable on older accounts where they have likely been accruing compound returns – that is, growth on growth – over the years or decades since you last contributed to them.
If you think you might have lost a pension pot over the course of your working life, a good starting point could be to use the government’s tracing service to help locate it.
3. You may pay less in fees
The rules and regulations surrounding pension pots can change over time and it’s good to keep yourself apprised of any updates, as you may be unaware of additional benefits with newer schemes, such as paying less in fees.
Some older schemes might have higher charges that may lead to you potentially missing out on substantial savings. According to a report from interactive investor, a saver with £150,000 in a pension pot might potentially save £20,000 if they moved their savings from an old pension scheme with high percentage fees to a new account with either flat fees or tiered percentages.
Some old pension accounts can have associated fees of 0.75% or more, which is considered quite high.
Consolidating multiple pots could have the added benefit of reducing associated charges. A single pot will mean having to deal with a single charge on your funds.
3 cons of consolidating your pensions
1. You may be putting your defined benefit scheme at risk
Also referred to as a “final salary” pension, a defined benefit (DB) pension will pay you a guaranteed amount throughout your retirement. These schemes will pay out an income based on factors such as your earnings when you retired and how long you worked for your employer.
Deciding to consolidate your older pots could mean that you lose out on the guaranteed income that comes with a DB pension.
DB pensions are also better protected against investment risks as they put the onus on the scheme rather than the individual to deal with any fallout from investment losses.
2. Your money may be less diversified
Pension schemes can often be made up of multiple investments, which can fluctuate depending on the performance of the stock market.
If you have multiple pension pots, your money is likely to be spread out over a much more diversified portfolio of investments. In turn, this means it may be better insulated against any short-term market instability.
Meanwhile, a singular pot is more focused and so may be exposed to a greater degree of market risk.
3. You may be hit with additional charges
The process of consolidating your old pension pots into a new single account can lead to you being hit with associated charges.
There can be significant exit penalties tied to schemes and you may be charged for the transfer of funds as well.
The end result of this can be the loss of a considerable amount of your retirement savings, just to cover the administrative outgoings of consolidating your pot.
These charges may mean it isn’t worth your while to pool your savings under one scheme.
Work with us
Dealing with pensions can be a long and complicated process, and the right move can depend on your personal circumstances. The best first step is to seek advice from a financial planner.
Email email@example.com or call 0113 262 1242 to speak to an experienced adviser.
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.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.