Should I Consolidate My Pensions? Key Things To Consider

Victoria Ross a Chartered Financial Planner at Progeny considers if we should consolidate our pensions.

Did you know that the average person in the UK will have twelve jobs in their lifetime? We change jobs much more frequently nowadays than those in previous generations, where a job and an employer was often for life.

A consequence of this is that many of us accumulate multiple pension pots during our working lives. This issue has been increased by pension auto-enrolment; a positive government initiative that started in 2012, whereby employees are entered into a workplace pension scheme unless they actively choose to opt out.

Pension consolidation is a way to simplify your pension savings by joining them all together. This usually only applies to defined contribution pension schemes. Defined benefit, often referred to as final salary schemes, can normally only be combined if you move from one public sector job to another.

Clients I meet will usually have several legacy pensions plans and pension consolidation is therefore a common topic for discussion. Here are some of the benefits, risks and considerations involved.

Benefits of pension consolidation

Simplified management and tax efficiency

As we approach retirement and potentially the time when we might start drawing from our pensions, it can make sense to consolidate them into one place. Having one pension cuts down on paperwork and means you only have one scheme to monitor and one company to contact.

It can also potentially help with tax efficiency. Pension pots normally benefit from being 25 percent tax free on withdrawal and ensuring you are in a pension that has the full range of income options, including annuities and flexi-access drawdown, means you can access your pension in the combination of tax-free and taxable income that suits your circumstances and tax position. This can also be more straightforward if it’s from one pension pot rather than multiple pots.

Reviewing your investment options

The default investment approach on a workplace pension is likely to be something generically suitable for the average person and not bespoke to you. It may include a feature called lifestyling which usually reduces risk as you approach your normal retirement age, whether appropriate for you or not. The aim of lifestyling is normally to allow you to take 25 percent of the pension fund tax-free and use the remainder to buy you an annuity. This may not be what you want however, nor fit with your overall financial objectives.

Transferring the savings in all your old pensions into a new pension plan may allow you to find a solution with an approach and a level of risk suitable for your financial objectives. Someone with 30 years until retirement for example, can often afford to take more risk than someone who will be reliant on their portfolio in the next few years. Furthermore, a diverse portfolio with an appropriate asset allocation, both in terms of geography and sector, is less vulnerable to volatility in specific markets and can deliver a smoother, more predictable investment journey.

Improved death benefits

When a pension holder dies, the common options available to beneficiaries are to receive funds as a lump sum or a pension lifetime annuity. Consolidating your pensions into a more modern scheme could allow your beneficiaries to instead inherit the funds and retain them within a pension wrapper in their own name. Where the policyholder dies before age 75, funds are paid out tax-free and after age 75 they become taxable to the beneficiary.

Inheriting as a ‘drawdown’ pension means they would still benefit from the tax efficiencies of a pension, including it remaining outside of their estate for inheritance tax purposes. This effectively means that pensions can be passed down generations, making it one of the most efficient ways of passing on your assets.

It’s a worthwhile exercise to ensure that your pension expression of wishes (also known as death benefits nominations) are completed and reflect your current thinking.

One word of warning on transferring to a plan with improved death benefits, is that if you are in poor health at the time and pass away within two years of the transfer, the pension your beneficiaries receive may be assessed for inheritance tax purposes.

Reduced risk of ‘forgotten’ pensions

Pensions can easily become forgotten and lost over time, usually if we move house and forget to update our details, with the Pension Policy Institute recently reporting that there are three million pots not currently matched to their owner, at a value of £26.6bn. Consolidating your pensions means the older ones are less likely to go astray.

The good news is they should always be traceable, although this can take time and patience. If you think you have lost a pension, the first place to start should be to contact the company you’ve worked at to find out if you had a pension and if so, who administrates it. The human resources and finance departments are usually the ones in the know.

The government also provides an online pension tracing service where you just need your previous employer’s name.

Risks and Considerations

If you are considering a pension consolidation exercise, there are also some risks and other considerations to be aware of.

• Costs – Check for any costs of transferring out of your scheme and also that the policy costs of the new scheme are reasonable. This may include provider platform and fund charges.
• Guaranteed benefits – Valuable benefits, such as guaranteed annuity rates and higher levels of tax-free cash above 25 percent of the fund value (found normally in older pensions), can be lost on transfer. It is therefore vital that you check for any guaranteed benefits and seek advice before proceeding.
• Lifetime and annual allowances – If you are at risk of exceeding your lifetime allowance (the total amount you can build up in all your pension savings without incurring an additional tax charge), you may benefit from using the ‘small pots’ payment method on pensions below £10,000. This does not use any lifetime allowance and nor would it reduce the annual amount that you can contribute to pensions. However, consolidating smaller pensions into one over £10,000 could take away the ability to use ‘small pots’ payment.

If you're unsure about any aspect of consolidating your existing pensions then you should seek financial advice, as a financial adviser will review all your plans and options and make sure that any consolidation is suitable for your needs.