This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
UK residents now change jobs 17 times, on average, across their working lives. With each new job that you take, moreover, your employer is obliged to sign you up to the organisation’s pension scheme under UK auto-enrolment rules. As such, you could end up with over a dozen pension pots from your career. This can present a headache later as you approach retirement.
Consolidating your pensions into a single pot, however, can make things far easier to manage and can confer other benefits too. However, it is not always wise to consolidate everything as some schemes are often worth holding onto. Below, our team at Elmfield Financial Planning in Padiham outlines the pros and cons of pension consolidation.
We hope this is useful and please get in touch if you’d like to discuss your own financial plan with us over a free, no-commitment consultation.
How does pension consolidation work?
Pension consolidation involves transferring the funds in one – or more – pension pots into a dedicated one. This scheme is often a personal pension which you set up on your own, but you can also choose to consolidate your pensions into an existing workplace scheme.
You might choose to combine some (or most) of your pensions into one pot, or all of them. It depends on your financial goals, circumstances and the specifics of each scheme in question. Certain pension types can be more difficult to transfer than others, requiring expert help.
For instance, a final salary pension does not involve a pension “pot”. Rather, your employer promises to pay you a guaranteed lifetime income in retirement (e.g. based on years of service and salary). In these cases, you need to consult a financial adviser about the scheme’s cash equivalent transfer value (CETV) to convert it into a lump sum.
Reasons in favour of consolidation
Having a single pension pot is far easier than trying to manage a dozen or more. Each scheme will be different – involving various fees, rules and procedures. These can be hard to remember, leading members to make costly decisions based on mistaken assumptions.
Consolidating your pensions also simplifies the review process. Rather than reviewing the investment performance of several schemes, you only need to do this once (e.g. annually). You also only need to deal with a single provider – dramatically reducing the amount of time, effort and documentation involved with communication.
Another potential benefit is the lower pension costs you could access. When you invest in a pension, various fees will eat into your returns (e.g. platform fees and fund management fees). By combining pensions, you could dramatically reduce these costs by moving to a lower-cost platform. The new scheme might also offer a wider range of high-quality funds, involving a more competitive fee structure.
Finally, certain pension schemes – particularly older ones – offer less flexibility to members than you might otherwise access. This is often because a scheme was established before April 2015, when pension pots could only be used to purchase an annuity. Today, you have the option to withdraw from pension pots flexibly, but many schemes are not structured to facilitate this. Here, transferring to a different scheme can help you take full advantage of the Pension Freedoms.
Reasons to hold onto a pension
Certain pensions are very valuable and may be worth keeping in their current form. In particular, a final salary pension (often called a “gold plated” pension) should usually be retained, as the benefits are nearly impossible to replicate elsewhere; i.e. a high, guaranteed lifetime income in retirement that is linked to inflation. This, when combined with your State Pension, can provide much financial stability and peace of mind in retirement.
It may also be worth keeping your current defined contribution pension at your workplace if your employer offers to match your contributions. By transferring, you are likely to lose this benefit. Certain schemes may also include valuable “safeguarded benefits” that you may wish to hold onto such as guaranteed annuity rates or protected tax-free cash.
For those planning to access their 25% tax-free lump sum from their pension(s), it may be worth holding onto certain schemes holding less than £10,000. You can take all of the amounts in one go after age 55 (25% is tax-free), regardless of your total pension savings – even if they exceed your Lifetime Allowance. Also, this does not trigger the Money Purchase Annual Allowance rules which limit your annual allowance to £4,000 per year.
Finally, be careful to check any exit fees before consolidating any pensions. Some schemes will impose punitive charges when you transfer out. Depending on the charge, it can still be worth making the move. However, sometimes the cost will be too prohibitive to be financially viable.
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
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T: 01282 772938