Should I consolidate my pensions?


If, like most people, you've had multiple different places of employment during your working life, it's likely that you have several different pension plans. Consolidating your pensions simply means taking all these different pensions and putting them into one wrapper.

This can make it much easier to manage your pensions, and ultimately may give you access to a wider range of investments. However, there can be drawbacks to consolidating too – often regarding the terms of your existing pension schemes, including any charges and penalties associated with leaving them.

What are the benefits of consolidating?

Better buying power

Combining all your pensions into one pot can help you to get a better deal from annuity providers, if you are planning to purchase an annuity. Smaller pots may be too small to buy annuities at all, or may only be able to afford ones with unattractive rates.

The same principle applies to income drawdown as well. It's usually more cost-effective to draw from a single large pot than many smaller ones. Again, you might find that some providers won't allow income drawdown from pots below a certain size.

Easier to manage

Consolidating makes your pension easier to manage and keep track of, and gives you a clearer idea of exactly how much you can expect to receive when you retire. It'll also mean you're only dealing with one provider, making it more straightforward to deal with if you decide to take a more active role in how your pension is invested.

More control and investment options

Not all pension schemes are created equal, and some older schemes are locked into poorly-performing funds, or schemes that levy comparatively high administration charges. Consolidating gives you the opportunity to make your money work harder, or at least give you more control over where it is invested.

People who consolidate their pensions often put them into a personal pension, such as self-invested personal pensions (SIPPs). Which can provide access to a huge range of investment options.

What are the disadvantages of consolidating?

Losing benefits

Any defined benefit or final salary pension schemes, which you may have if you've worked in the public sector or for a large company, are normally not worth consolidating into a defined contribution plan. These schemes have benefits at retirement such as a minimum pension guarantee, linked to your salary and period of employment, which you will lose if you move them. Additionally, the investment risk and any charges will transfer from your employer to you.

Some defined contribution plans also have benefits, such as guaranteed annuity rates or the option of a higher tax-free lump sum, which you would lose by consolidating. Again, it's usually best to leave these where they are, but it depends on your plans – for instance, if you have no intention of drawing a lump sum, that benefit's not doing you any favours.

Exit fees

Some older pensions had high exit fees to discourage people from switching, which could make huge dents in savers' overall pots. However, the Financial Conduct Authority recently (Consultative Paper CP16/15 - May 2016) proposed that exit fees should be capped at one per cent of the customer's overall pot – a huge relief to people who previously faced higher charges.

When the rules come into force, exit fees won't be nearly as big a drawback to consolidating pensions as they once were. However, one per cent of a pension pot can still be a considerable amount, and this should be taken into consideration when considering the benefits of consolidation.

Market Value Reduction

If you switch from a with-profits fund to another provider, your pension could lose value from a Market Value Reduction – a measure designed to provide fair returns for all investors based on the earnings of the fund.

How should I decide?

Whether or not to consolidate your pensions depends very much on your individual situation: how many pension pots you have, how much they're worth, the terms of those pension schemes, and how far you are from retirement age. For some people, there's a clear advantage to consolidating, while for others it's much less straightforward. 

You should always seek professional financial advice before making a decision, as consolidation cannot be reversed. An independent financial advisor will review all your pension schemes and calculate the pros and cons associated with keeping them as they are, or consolidating some or all of them.

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