Consolidating your pensions helps you to monitor how your money is invested and keep charges to a minimum. This article will guide you on how to combine or consolidate your pensions.
Consolidate Pensions
What does it mean to Consolidate pensions? Consolidate Pensions are pensions you bring together into one pot. It’s also known as ‘transferring’ or ‘combining’ your pensions, as you move your money out of one scheme or retirement product into another. Also, It enables you to keep your retirement savings in one place and also makes things simpler for you when you reach retirement, as you will only have to decide how to take an income from one pension pot.
Should I Consolidate My Pensions
Many people choose to consolidate their pensions to help them manage their retirement savings and track their progress more simply. There are some reasons people choose to consolidate their pensions. They include:
- Saving money
- To achieve better growth
- Convenience
- Keeping track of your pension savings
#1. Saving Money
Every pension pot you have will be managed separately, meaning each one has its own annual management fees. Some of these fees may be higher than others, for instance, some may charge 1 percent or even more, but others may charge only 0.5 percent. Combining your pots into the one with the smallest management fees can reduce this kind of waste, but it’s necessary to take some good advice to make sure it’s the right decision.
Your adviser may also help you find a fund with lower fees. A management fee of just 1 percent can reduce the total size of your pot by more than 20 percent over the course of your working life. So one little change made early enough could save you tens of thousands of pounds in the long run.
#2. To Achieve Better Growth
Fund performance can be an important factor in deciding whether to combine pensions. If you have several pots, it’s likely that one will have outperformed the others (although remember the adage that past performance is not a guide to future performance). Look for consistency in performance over time. Alternatively, your financial adviser may recommend a whole new fund.
#3. Convenience
Managing one pension pot is inevitably much easier than handling several. Managing a pot involves more than just checking the balance once a year. You also want to make sure you invest in the right fund for your risk profile, which will change as you get closer to retirement. Most of all, it will be far easier to arrange to draw your pension if you only have one pot to worry about. Combining your pensions on a modern investment platform would enable you to manage everything online, perhaps even through a mobile app.
#4. Keeping Track Of Your Pension Savings
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 lose the paperwork, you may not be able to inform pension providers that you’ve moved house. In this way, pensions can be forgotten about.
Consolidating your pensions before retirement is usually a wise move. However, there are some circumstances in which it isn’t the best option to consolidate your pension. So make sure to ask an independent financial adviser about what you need to do.
Reasons Why You Should Not Consolidate Your Pension
- Final Salary Pension
- Guaranteed annuity rates
- Transferred Penalties
- High Exit Fees
- Enough Growing Pension
#1. Final Salary Pension:
A final salary (or ‘defined benefit’) pension provides a guaranteed income for life, which is an extremely valuable benefit in an uncertain world. This income won’t be affected by stock market falls, provided that the scheme remains viable. In this case, scheme failure should be covered by the Pension Protection Fund. However, if the transfer value is quite small, or you are worried about the scheme’s long-term prospects, then ask an IFA (independent financial adviser). whether a transfer might be best.
#2. Guaranteed Annuity Rates
Some pension schemes offer a guaranteed annuity rate (GAR), which may enable you to buy an annuity with a much higher annual income than the offer you might have received. It may not be clear from your pension documentation whether you have one or not, but your adviser should check for you. Having a guaranteed annuity rate is usually a good reason not to transfer out, as by doing so you would lose it.
#3. Transferred Penalties
If you want to transfer your pension; check to see whether its 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.
#4. High Exit Fees
If any of your current providers charge huge exit fees, it will be important to weigh up the trade-off between these and the amount you will save on annual fees by switching.
If you make this comparison over a period of five years, it may become clear that it’s not worth moving.
But if you are a younger saver and you’re not going to be using your pension for another ten years or more, you may find it cost-effective in the long term to switch.
#5. Enough Growing Pension
If any of your current pension schemes have generated strong returns and your money is growing at a rate that you’re happy with, transferring your pension might not be right for you.
How Do I Consolidate My Pensions
If you want to consolidate your pensions, there are several things you will need to consider. They include:
#1. Types Of Pensions
You must check the types of pensions you have. For example, if any of your pensions are defined benefit plans, otherwise known as final salary pensions, these offer valuable benefits that could be worth keeping.
Defined benefit pensions pay you a guaranteed income at retirement that will usually keep pace with inflation. Transferring away from this type of pension may not be in your best interests, so you should always seek professional pension advice if it is something you are thinking about doing.
#2. Check Your Charges
If you want to consolidate your defined pension, check how much you are paying in charges. Often, older pensions have steeper charges, so you may be able to save by transferring your pension to a cheaper plan. If the fees you are paying are higher than 1 percent, you are almost certainly paying more than you should. Cheaper pensions allow you to conserve as much of your investment growth as possible.
#3. Check Your Pension Performance
It is worth looking at your pension performance too. If one or more of your pension plans has produced underwhelming returns relative to some of the others you hold, it could be time to transfer your savings to a different pension or change the investments within the underperforming pension.
Before consolidating your pensions, check which investment options are available on the plan to which you are considering moving your savings. Most pension schemes automatically invest your money in their “default fund”, unless you specifically choose where you want your money to go. This type of fund typically puts your money into riskier investments the longer you have to go before retirement, then gradually moves it into less risky investments such as bonds and cash as your retirement date approaches. However, there are often other funds to choose from that might be more appropriate for you.
Bear in mind that when you do transfer your existing pensions to a new plan, this will involve selling your pension investments before you invest your money in your new plan, so you will be “out of the market” while you transfer. If the market falls during this time, you will not lose, but if it rises, you will not benefit from any investment growth.
#Check For Exit Penalties
Some pensions charge an exit penalty if you want to move your money elsewhere, so if one of yours does, you need to establish whether it’s worth transferring your pensions into one plan, or if the costs will outweigh the benefits.
Consolidating My Pensions
If you have traced and found the type of your pension, you can go ahead and consolidate your pensions into a single pot, You will need to start an application to transfer via the pension provider that you wish to use moving forward. Often, with modern contracts, you can log in online to initiate a transfer, and all you will typically need is the name of your existing pension providers, the policy numbers, and approximate values.
You can find this information on your annual pension statements, however, tracking down your pensions may be the first obstacle to overcome.
Can I Consolidate My Pensions
You can consolidate your pensions. If you have built multiple pensions in your workplace and your personal pensions, that is not the same as your state pensions. If you want to consolidate your pensions into one pot, this will tell you what to do.
Can I consolidate workplace pensions?
Usually yes, with a professional pension adviser. If you are fortunate enough to have a “gold-plated” final salary scheme, you can probably consolidate it. Although you may decide to keep it right where it is with defined contribution (DC) workplace pensions, if the amount you’ll have when you retire depends on investment performance, consolidation is worth considering. You can do either of the following:
- Consolidate as you move jobs, moving your pension with your previous employer into each new employer’s pension scheme (this won’t happen automatically).
- Consolidate any number of old workplace pensions into your current workplace pension or into an entirely separate, personal pension.
Can I consolidate personal pensions?
Yes. Arguably, it’s less likely that you’ll have built up a large number of personal pension pots over time, as you will have been in control of setting up any personal pensions up and paying into them in the first place. But if, at one point, there was a good reason for having multiple pots, but you now want to merge them into a single scheme, this shouldn’t be an issue.
Can I consolidate the state pension?
No. This is an exception to the consolidation rule. Unlike most pensions, you don’t pay directly into the state pension. Instead, its value is linked to your National Insurance contributions. The income you’ll receive is capped at the same maximum amount for everyone (based on the new state pension rules). It’s fully managed by the government, and it’s not possible to combine your state pension “pot” with any other pension.
In conclusion, consolidating multiple defined contribution pension pots into a single scheme can cut down on paperwork and could even leave you with more in your pot until your retirement. But it’s not a step that you take hastily, and in some cases, you should not consider taking it at all. Always do your research and try to consider the most beneficial step to take.
FAQs
Can I consolidate my pensions myself?
Can I move all my pensions into one? You would have to transfer out of one or more and move them into another one, this could be with an existing provider or with a new one. Before transferring out of a pension scheme, make sure you aren’t going to be giving up any valuable guarantees.
Is it a good idea to combine pensions?
If you have several pension pots, there are potential advantages if you combine them into one. If you combine them, you: can keep track of, and manage, your pension savings more easily. might save money if you can move from a higher-cost scheme to a lower-cost one.
Can I transfer my pension to another pension?
You can transfer your pension fund to another pension scheme – generally any time up to one year before the date when you are expected to start drawing retirement benefits. In some cases, it’s also possible to transfer to a new pension provider after you’ve started to draw retirement benefits.
