There are lots of reasons why you might want to consider merging your pensions into one pot.
Four reasons why you should consolidate your pensions
- It makes them easier to review
- Keeping track of your pensions isn’t easy particularly when you have several pensions with different providers. By combining your pensions together, you can more easily keep track of them and see how they’re performing.
- With one pension, you have complete visibility over your money. You will only have to interact with one pension provider, saving you time, hassle and paperwork.
- You can reduce your pension costs
- There’s a good chance that you will be able to reduce your pension costs by combining them together. All things being equal, the less you pay in charges the more you have for retirement.
- Some older-style pensions come with very high charges. These can erode your pension value over time, reducing how much is left for your retirement.
- Potential for improved investment performance
- How your pension is invested will determine how much it rises and falls in value.
- Some pensions only provide access to a few investment funds, which may not perform very well. Whereas more modern pensions can provide access to thousands of different investments.
- More flexibility when it comes to retirement
- It used to be the case that when you reached retirement, you had to use your pension to purchase an annuity. The rules changed in 2015, allowing people to flexible withdraw an income from their pension pot.
- Despite the rule change, most pensions are unable to facilitate flexible drawdown. This is because the pension was set up before 2015 when purchasing an annuity was the only option. Most people today flexibly withdraw an income from their pension. They are often shocked to learn that their pension provider cannot facilitate this.
- You may need to merge your old pensions into a newer pension if you want to take advantage of flexible drawdown. This is often a key reason why people consolidate their pensions.
Four reasons NOT to consolidate your pensions
- You have a final salary pension
- If you have a final salary pension, then consolidating your pension isn’t likely to be the best thing to do.
- Final salary pensions, otherwise known as ‘defined benefit pensions’, provide a guaranteed income for life. What’s more, this income tends to rise with inflation. These are very valuable benefits that will be lost if you consolidate your pension.
- You have valuable guarantees
- Some pensions come with valuable guarantees. These include guaranteed annuity rates, protected tax-free cash or guaranteed minimum pensions. These are known as 'safeguarded benefits’ and are typically lost if you consolidate your pension.
- Your pension receives employer-matched contributions
- If you’re an employee, chances are that you and your employer both pay into your workplace pension. Typically your employer will match your pension contributions up to a certain level.
- You will pay an exit fee when transferring away
- Some pensions will charge you an exit fee if you decide to transfer away. The exact amount and the terms under which a fee applies will vary between pension providers.
How to consolidate your pensions?
If you’re looking to combine your pensions together, you can often do this yourself. To get started, you will need to contact your current pension providers and obtain a transfer quote. This will tell you the value of your pension for transfer and include any exit penalties.
Alternatively, you can work with an independent financial adviser who will be able to arrange this for you. Before consolidating your pension, they will provide a full review of each of your pensions, making sure that pension consolidation is the right thing to do. They will then complete the paperwork for you.
