If you have multiple pensions, should you merge them into one? This article looks at what pension consolidation is and considers the advantages and potential pitfalls.
Published on 23 Jul 20215 minute read
Are you a serial collector of pensions? If the answer is yes, you’re not alone. The average person in the UK switches employer 11 times throughout their career (1), collecting multiple workplace pensions (and the odd personal pension) along the way.
Good news that so many of us are squirreling cash for the future but having your retirement savings fragmented across numerous pensions does have its challenges, which is why merging pensions together – aka pension consolidation – has become a popular option.
Pension consolidation just means bringing together multiple pensions and combining them into one plan. To do this, people often choose to move all their pensions to a new provider or they could move everything into one of their existing pensions.
Pensions are renowned for their over complicated jargon and impenetrable paperwork so why put yourself through more of it than you need to? One of the joys – not to mention great advantages – of having fewer pensions is the admin you’ll cut back on. Not only does this free up time, it also makes it much easier to keep track of your pensions and how they’re doing.
Did you know there are around 1.6 million unclaimed pension pots with £19.4 billion in them? (2) If you’ve lost a pension, get in touch and we’ll talk you through how to find it.
Lots of smaller pensions can make it difficult to see if you’re contributing enough to reach your retirement savings goals. If you have just one pension, you’ll have a single statement and can see clearly how much you have, how your pension is performing and what you need to pay in to get where you want to go.
Many people pay into multiple pensions at the same time and this can make it tricky – particularly for higher earners – to stay on top of pension allowances such as the annual allowance and lifetime allowance. And for those wanting to take advantage of pension carry forward rules to contribute a lump sum, dealing with more than one pension provider can be time consuming.
The success of your pension isn’t just down to how much you pay in. A lot rests on the performance of your pension investments. If you’ve only got one pension, it’s much easier to see what you’ve got, monitor investment performance and make any changes.
But, with just one pension, make sure you’re not stuck with limited investment choice. This could have an impact on your ability to build a decent portfolio of pension investments. Some pension providers only offer a small range of investments while others have lots of choice.
Pension providers charge you in exchange for looking after your pension and investing on your behalf. With multiple pensions there is a risk of doubling or tripling up on some of these charges. Merging pensions can often reduce the amount you pay in fees – but remember, as with most things in life, cheapest isn’t necessarily best.
As your pension grows, you may also find that some providers give you a discount on fees. By spreading your retirement savings across multiple providers, you could miss out.
Some people are looking for more freedom and flexibility over accessing their pension savings when they retire. Certain pension schemes that were set up before 2015 don’t offer the flexibility that newer pensions do. An example of this is income drawdown (also known as flexi-access drawdown) which allows you to keep your pension invested and withdraw from it whenever you want to.
Certain pensions come with valuable benefits that you lose if you transfer them, so it's always important to check carefully. In particular, it's rarely a good idea to transfer a defined benefit pension – otherwise known as a final salary pension.
Defined benefit pensions were the norm in the old days and while they are less common today, some companies do still offer them. Certain public sector pensions are also defined benefit. At Bestinvest we don’t accept pension transfers from defined benefit schemes.
Some other older pensions offered valuable guarantees such as preferential income or growth rates which would be lost on transfer. It is always important to check this before making a decision.
If you’re transferring pensions to cut down on fees, then do check whether your pension providers charge hefty exit fees. Our pension specialist Bertrand Pole has this tip: “To understand if it makes sense to transfer, you should compare five years' worth of charges from the new pension against exit charges from the pensions you are thinking about consolidating. If you’ve got 10 years or more until you retire, some penalties do become cost-effective over time."
If you are transferring to Bestinvest, we pay up to £500 towards exit fees.**
It is a legal requirement that pension companies keep pension funds separate from company money to help protect pension savers.
You are also covered by the Financial Services Compensation Scheme as long as the pension provider is UK-regulated.
We offer a SIPP* (Self-invested Personal Pension) that is a popular choice as a home for consolidated pensions. SIPPs give you the freedom to pick from a wide range of funds or shares and the flexibility to take your pension savings how you want when you come to retire. It’s quick and easy to transfer a pension to Bestinvest.
We also offer free pension reviews if you’d like to speak to someone about your pensions.
1. Pensions Policy Institute, October 2018
2. Association of British Insurers, May 2020