Should I split my pension across two drawdown providers?

08 July 2021

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Question by Paul

Hi,

What are the pros and cons of splitting your pension fund across two income drawdown providers drawing down on both at the same time?

Thanks,

Paul


Answered by Josh Butten

Hey Paul!

Ah yes - the old adage of 'not having all of your eggs in one basket’.

General consensus is that there is no benefit to keeping two straightforward personal pensions separate. By having multiple personal pensions, you will need to be prepared to notify the second pension provider when your trigger the Money Purchase Annual Allowance, when you have withdrawals from the other pension and use some of your Lifetime Allowance (as the allowance is shared between them)… and not to mention worn out hinges on your letterbox from constant HMRC letters confirming changes to your Tax Code each time you change your withdrawals from one pension and the other provider is slow to catch up. If possible, a single pension will keep your financial life simple in retirement.

Back to the famous adage; having your savings all in one basket can feel like you are subject to the risks of any one pension provider. I would encourage you not to lose sleep over this - so long as you are using a mainstream personal pension and are invested in a globally diverse portfolio suited to your appetite for investment risk. Modern personal pensions are rather well protected against a provider failing or going into liquidation.

Having said that… there is one very good reason to not merge your pensions - which is that when you transfer a pension you may lose any benefits which are specifically related to that pension contract. This could be enhanced tax free cash, a guaranteed annuity rate or even a guaranteed growth rate. These types of ‘non-standard benefit’ are not uncommon for pensions accrued before 2006. If you have pensions with these benefits, you would want to be careful, as a transfer would lose those benefits.

In summary; if your pensions are straightforward and no special rules apply to them, you would be well served by consolidating to single product to manage in retirement. A ‘good’ personal pension is one which balances low costs with good underlying investment options. Be careful if you have any ’non-standard benefits’ and speak to an adviser if you’re unsure.

Answered by

Josh Butten

Co-founder

Josh is a co-founder at boosst, an independent financial planning firm that works with families across the UK - and currently the CISIs Financial Planning Firm of the Year. Josh specialises in helping families to answer their ‘big questions’; which is achieved by bringing together personal finance expertise with cashflow planning software.