Should you consolidate your pensions? 

At any point in your working life, you may wish to find out exactly how much you have in pension pots and ask yourself if you should consolidate your pensions.

If you don’t know how much is in your pension and have multiple pension pots, trying to figure it out can be overwhelming.  

What is pension consolidation?

Pension consolidation means combining all (or most) of your pension pots into one. 

Over your career, you may build up a collection of different pension pots via various schemes and employers, and you’ll eventually have to decide whether to consolidate your pensions or leave them separate. 

Working out the best thing to do depends on many factors, and asking yourself the following can help:

  • What type of pensions do you have?
  • How much they are worth?
  • How well are they being managed?
  • Are there any special guarantees attached?

How do charges matter?

Your personal pension pot will be managed separately, meaning each has its own annual management fees, some of which may be higher than others.

For example, some may charge 1% or more, but others may charge only 0.5% or less. 

Combining your pension pots into the one with the smallest management fees can save you money. 

So, one little change made early enough could save you tens of thousands of pounds in the long run. 

Is fund performance important?

Fund performance can be important in deciding whether to combine your pensions. 

If you have several pots, one has likely outperformed the others. Although, remember that past performance is not a guide to future performance. 

It’s worth looking for consistency of performance over time. Alternatively, a financial adviser may recommend a new fund. 

Combining pension pots to keep track of them

When you have multiple pension pots from various providers, you run a much higher risk of losing track of one or more of them altogether. 

House moves are notorious when it comes to paperwork getting lost, and if you misplace any, you may not be able to inform any pension providers that you’ve moved house. 

Read if Equity Release is a good idea.

Can I combine my defined benefit pensions?

If you have an occupational pension, such as a final salary or defined benefit, you may be offered the option to transfer into a personal pension.

You should think very carefully before deciding to do this. Such transfers often involve trading a guaranteed lifelong income, with indexation, for a finite sum of money in the form of a pension pot. 

Getting advice before transferring a final salary pension is usually a legal requirement, as this is a big decision and cannot be reversed. Advising on transferring defined benefit schemes is a very complex process and requires specialised advice. 

Are there any disadvantages of combining pensions?

Consolidating your pensions before retirement can be a wise move. 

However, there are some circumstances in which it isn’t the best option, so it’s worth taking independent advice to decide what you should do. The following are some reasons to maybe not consolidate:

  • Defined Benefit

As explained above, a final salary or ‘defined benefit’ has valuable benefits in an uncertain world. This income won’t be affected by stock market falls, provided that the scheme remains viable and, in the case of scheme failure, should be covered by the Pension Protection Fund.

However, if the income is relatively small, or you are worried about the scheme’s long-term prospects, ask a specialised adviser whether a transfer might be best. 

  • Do any of my pension pots have guaranteed annuity rates?

Some pension schemes offer a  (GAR), which may allow you to buy an annuity offering a much higher annual income than you would otherwise be offered. 

Your pension pot documentation may not indicate whether you have one, but an adviser can check this for you. 

Having a GAR is usually a good reason not to transfer out, as doing so would result in losing this benefit. 

  • There could be penalties for transferring to another provider.

Some schemes may impose charges, such as an exit fee when you transfer out. Additionally, consider any setup and ongoing fees for the new pension scheme. 

Check whether your transfer value is the same as its current value.  

If it is lower, then this may be because there are penalties for transferring. If there are, your adviser will need to check the nature of the penalties and whether they can be removed. 

How do I decide about combining my pension pots? 

Taking advice from an Independent Financial Adviser will give you a clear and unbiased recommendation based on your needs.

There is no standard right or wrong way; all advice is bespoke. Consolidating your pensions can simplify your financial management and boost your retirement savings.  

Combining multiple pots into a single scheme can streamline your investment strategy and reduce costs.  

However, it’s crucial to evaluate your specific situation and that you take advice.

Please get in touch with us today if you’d like to assess your pension pots.