Essential guide to pension consolidation
Are you not sure how many pensions you have or how to trace them? Do you have lots of smaller pension pots floating in the ether from old jobs? Did you know that you can round them up and keep them all together? Introducing pension consolidation! The handy way of keeping all your pensions up in one, single, easy-to-follow place.
In this guide, we’ll walk you through the basics of pension consolidation, the pros and cons and some frequently asked questions to help you understand more and arm you with the knowledge to make the right decision.
What is pension consolidation?
Pension consolidation is when you combine several different pensions together into a single pot. Many people have lost or forgotten about pensions from previous jobs, or you may just have quite a few that you’re aware of but find it hard to keep track of them all separately.
There are millions of people in the UK who are juggling multiple pensions. In fact, Boring Money’s recent Pensions Report 2023: Consolidation and change found that 44% of 55 to 64-year-olds and 27% of 25 to 34-year-olds hold two or more pensions.
This is where pension consolidation can help you to have everything under one roof – so you have less paperwork to wade through when you want to check how your pot (or ‘fund’) is doing. However, despite the number of Brits with multiple pension pots, our research shows that only 3 in 10 pension holders have consolidated to date. So if you’re one of the 7 in 10 who haven’t, how do you decide if you should consolidate and how do you do it?
Reasons to consolidate your pensions
Is pension consolidation the right move for you? Your pension savings can be worth an awful lot of money – the average 55 to 64-year-old has £127,000 in their pot – so it makes sense that you want to consider all your options and think carefully before committing to moving anything around.
It’s more convenient
Obviously, managing a single pension is bound to be easier than managing several pensions. Combining them can make it easier to keep track of how much you’re saving and review the performance of your investments over time. This means less rummaging around for paperwork or phone numbers to contact different providers! It also makes things easier and quicker when it’s time to start taking from your pension savings, so if pension drawdown looks like the route you’re going to take, consolidation is a bit of a no-brainer.
Consolidating your pension can offer advantages like a streamlined structure, potential fee reduction, simplified monitoring of retirement savings, and estate planning convenience.
Could save you money
Sometimes pension consolidation can save you money. Each pension you own with a different provider will have different management fees. If you transfer your savings to a provider with lower fees, for example, over time you could save yourself money. However, pay close attention, as some providers charge exit fees which could eat away at the savings you’re making by transferring. And of course, you want to avoid transferring your pensions to a provider which charges even more!
It’s quite possible to save money by consolidating your pensions, but remember, it may also be possible to save money simply by making changes to fund choices within your existing plans. The fees you pay can usually be broken down into the annual percentage charge for individual investment funds and also a platform charge for the firm that manages your pension. Sometimes, these two fees are combined into an ‘all inclusive’ fee. It’s important to understand what you’re paying on each of your existing pension plans, before making a comparison with the plan you’d like to keep. This may all take a bit of research, but it can be well worth the effort. There’s a huge bandwidth of charges between different pension funds and providers, so a saving of just 0.5% per year can make a big difference in the long term!
May get better growth
Past performance is never a guarantee of future success. However, you may have one or two pensions which have been performing significantly worse than others over a long period of time. And equally, you may have a couple that have consistently earned you better returns than the rest. Look for consistency over time; If you have one or more funds which are persistently underperforming, you may find that you can get better growth by transferring to a different fund with a different provider.
Consolidating pensions might offer better growth opportunities if the new plan has better investment options and lower fees. Nevertheless, each person's situation is unique. Initially, you might want to assess your investment risk profile and your tolerance for financial loss, considering the time left until your envisioned retirement date. If your selected retirement date is just around the corner and you are not comfortable with short-term losses, consolidating your pension is unlikely to offer better growth without exposing you to excessive risk. Alternatively, if your pension investment horizon extends over many years, and you are open to higher levels of risk, consolidation could potentially lead to better growth, although of course this cannot be guaranteed.
Can be quick and easy
Pension consolidation is getting easier and easier and there are now several providers on the market which make it quick and simple to do. PensionBee, for example, is a popular pension consolidation platform which allows you to combine your previous pensions into a new fund for free – so it doesn’t need to be expensive and you can get the process started in just a few clicks.
The good news is that, nowadays, it’s easier than ever to tackle this job. Some of the more modern pension providers focus their marketing specifically on the ease of consolidating pensions into their products. If you’re currently in employment, it can often make sense to consolidate into your current workplace scheme and that could mean a bit more effort on your part, but again, worth it if the charges are particularly low and the fund choice is suitable. In some cases, the value or the complexity of your retirement planning may mean it's worth seeking regulated financial advice. This will add another layer of cost, of course, but can be money well spent to avoid making expensive errors, or even to save time on research and administration. Also be aware that defined benefit, or final salary, pensions with a cash equivalent transfer value (CETV) of more than £30,000 cannot be transferred without regulated financial advice.
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