Should I consolidate my pensions?
On average, individuals in the UK have 11 different jobs during the course of their working life. This often results in many of us having a number of pension plans with different employers and providers which can be difficult to keep track of. This could mean that some individuals may not know what pension provisions they have built up or if they are likely to meet their retirement goals.
One of the most common questions we as Financial Advisers get asked is, “Should I consolidate my pensions into one?” This question has become even more relevant since 2012, when auto-enrolment was introduced. Auto Enrolment forced employers to opt their employees into a pension scheme and then assists them by contributing towards their retirement. For those of you who have had multiple jobs throughout your career, you will have collated even more pension arrangements as a result of auto enrolment that perhaps you would have before.
What is pension consolidation?
So, what does pension consolidation mean? Well, to put it simply, this is an exercise whereby you bring all of your pensions together. This can be done by merging two or more of your existing polices into the same plan or it may be better for you to collate these in a new plan altogether.
Is consolidating my pensions right for me?
Firstly, consolidation may not be appropriate for everyone so each case is assessed individually. Here at Tideway, we have helped many individuals with such an exercise over the years and is certainly something we would consider to be one of our specialist subjects. Analysing and evaluating your pensions accurately can be difficult and we would always encourage individuals to obtain regulated financial advice.
Potential Benefits of Consolidating Pensions
Pension consolidation certainly has benefits with many individuals valuing the simplicity of having all of their pensions in one place. By consolidating your pensions into one:
This creates less administration for you as the policyholder as you wouldn’t need to be sent annual statements from any number of different providers.
It can also make it easier for you to manage as you would be able to align your full retirement savings into the one investment strategy, which can help you see your progression towards retirement. By retaining multiple pension arrangements, it may be that each one is being invested differently to each other and whilst diversification from an investment standpoint is certainly important, it may be that these differing investment strategies are actually being counterproductive.
You can combine a single, focussed investment strategy alongside a retirement age that meets your personal objectives. Some pension arrangements are often invested into a “lifestyling” fund meaning it targets the purchasing of an annuity at a given retirement age in the future, which is usually on your 65th birthday. Purchasing an annuity may not be the best option for you in retirement, as you would perhaps like more flexibility in the way in which you draw your pension benefits. As such, this approach may not be right for your own personal circumstances. The main downside of this approach is that you may wish to retire earlier or later than the chosen retirement date and therefore this strategy would not fit in line with your retirement plans.
Limited fund choices; some pension plans may only allow you to invest in a small level of funds or portfolios. This could mean that you are invested into a strategy that may not match your attitude to risk or investment timelines. Here at Tideway, we select our fund managers carefully that each use their own expertise to find the best investment opportunities available.
Some pension schemes may also have limited retirement options.
Many retirees now value being able to vary the amount they draw from their pension from year to year by using flexible drawdown or UFPLS (Uncrystallised Funds Pension Lump Sum). These options are not always available in employment related pension arrangements but do allow you to be more in control of your retirement as you are able to tailor the income you draw around your personal circumstances.
Unified drawdown strategy; another reason to streamline your pension savings into one plan could be to have one single payment vehicle in retirement. If you have multiple arrangements where income is being drawn on different dates in the month, this could have a direct impact on your individual tax code which can be painful to sort out with HMRC. Having the one provider pay your income in retirement could make it easier for you to track and monitor your income each month and help you budget more effectively.
Potential Reasons Not to Consolidate
You are still contributing to your pension
If you’re an active member of a workplace pension scheme, it is generally not in your best interests to transfer. Employer contributions are a valuable benefit and not something that can be replicated elsewhere. Some employers may also be paying some of your administration costs whilst you remain a member of their pension scheme.
A consolidation may increase your ongoing costs
By transferring your pension into another arrangement, this transaction may involve increased costs. As there are many pension providers in the market, some arrangements may cost more than others and this is worth considering as the same needs could be met for lower charges.
The current arrangement allows drawdown
As mentioned above, many individuals are looking for flexible access from their pension arrangements in retirement. With this is mind, you may wish to keep your pension where it is if your existing arrangement offers flexible drawdown. A consolidation exercise needs to fit around your needs and transferring to another pension may limit your options in retirement.
You plan to simply buy an annuity at retirement
If you like the idea of a regular fixed income in retirement, then you may be someone who is looking at purchasing an annuity with your pension funds in retirement. If this is the case, then staying in a lifestyling fund or pension arrangement that gives you beneficial annuity rates would be more suitable for your circumstances rather than transferring to another pension arrangement altogether.
You are only invested in 1 or 2 funds and not interested in a strategy
Sometimes it may be easier to manage a pension fund where you are only invested in one or two funds. This could be more beneficial from a cost point of view but also helps you to track and perhaps analyse your investment with more scrutiny.
In general, pension consolidation certainly has its advantages but, as shown above this may not be appropriate or necessary for everyone. A pension consolidation exercise could offer you with a more individually tailored investment and retirement strategy aligned to your retirement goals and could also lead to you getting more flexibility in the way you access your pension funds.
A Guide on Pension consolidation: Key Considerations When Merging Pensions
When assessing if individuals should look into consolidating their pensions, there are a number of factors Tideway would take into account such as;
What type of pension arrangement is it?
Defined Benefit Pensions (DB) such as final salary pension and career average revalued earnings (CARE) schemes provide valuable guarantees such as a level of secure income in retirement, normally linked to inflation. Whilst these types of plans are less common nowadays, they are complex and require specialist financial advice if you are considering a transfer away from this arrangement.
Defined Contribution Pensions (DC) may include a protected retirement age, or an enhanced tax-free cash figure. Some other schemes may also offer guaranteed growth or annuity rates, which would likely be lost on transfer to another provider.
The Costs Involved
As part of Tideway’s analysis, we would look at if there are any added costs involved in transferring pension arrangements. It is important to check; if there are any exit penalties by transferring your pension away from one provider, if the arrangement charges you to sell your assets or if the receiving provider charges for incoming transfers.
We at Tideway, do not charge any initial fees in relation to this advice as it is part of our service offering, however other financial advisers may charge you for this advice so please make sure you look out for this.
The Lifetime Allowance
The lifetime allowance (LTA) is the limit on how much you can build up in your pensions over your lifetime before you are subject to further taxes. At present, the allowance stands at £1,073,100, therefore any total pension savings over this amount may be subject to a tax charge.
If you are one of the more fortunate individuals who this may apply to, then we would certainly point you in the direction of obtaining financial advice. It is possible for some individuals to obtain a protection to secure a higher lifetime allowance amount and therefore you must be careful when analysing your pensions as transferring a pension may cause you to lose such protection and could be detrimental in paying more tax.
The Value of the pension
Some pension schemes may offer you to chance to take a lump sum payment if a pension fund is under £10,000. Whilst you will pay income tax on 75% of this value, you may be able to avoid using your lifetime allowance in taking the pot as a lump sum under the “small pot” rules. This would therefore negate the idea of transferring the pension.
Although a pension contract in itself can be quite simple, each pension product is different and can be quite complex, therefore it is essential to seek financial advice so you know whether consolidation might be appropriate for you.
If this is of interest to you, please contact one of our Tideway Wealth Managers who would be more than happy to help. As part of our analysis, we would liaise with your current pension providers in order to fully understand your position and then be able to provide you with a personal recommendation based on the factors stated above. If we did recommend you consolidate, we would also assist with the completion of pension paperwork so you don’t have to.
If like many others, you struggle to keep track of multiple pots with various different providers, consolidating the pensions together might be appropriate for you. You only have one retirement, so it is important to plan properly and avoid what could be a costly mistake!
The content of this document is for information purposes only and should not be construed as financial advice.
Please be aware that the value of investments, and the income you may receive from them, cannot be guaranteed and may fall as well as rise.
We always recommend that you seek professional regulated financial advice before investing.