Keeping track of your retirement savings isn’t always easy, especially if you’ve joined several schemes over the years. Consolidating pensions into one place could make things easier to manage.
Many of us work for several different employers during our working lives, often joining our company’s workplace pension scheme each time. According to the Department for Work and Pensions (DWP), on average each of us works for 11 different employers. That means an awful lot of pensions paperwork to stay on top of if you’ve signed up to company pension schemes with all of them.
If you’re struggling to manage multiple pension pots and aren’t sure whether your money is working as hard as it possibly can for you, pension consolidation could be an option worth exploring.
Here’s what you need to know.
Should I consolidate my pensions?
If you’re thinking of combining pensions, there are several things you’ll need to consider first.
A good starting point is to check which 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 which are usually worth hanging on to.
Defined benefit pensions pay you a guaranteed income at retirement that will keep pace with rising living costs, and the amount you’ll get is dependent on the number of years you’ve been a member of the scheme and a proportion of your final year’s pay, or your average salary. Transferring away from this type of pension is rarely in your best interests, so you should always seek professional pension advice if it’s something you’re thinking about doing.
Combining defined contribution plans
Combining defined contribution or money purchase pensions is usually more straightforward, but it’s still worth seeking advice to make sure it’s the best option for you. Again, you don’t want to give up any important benefits. With this type of pension, the amount you’ll end up with at retirement depends on the size of the contributions, and how the investments these have gone into have performed.
When deciding whether to transfer your defined contribution pensions, check how much you’re 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’re paying are over 1%, you’re almost certainly paying more than you need to. Cheaper pensions often charge combined platform and fund fees of 0.5% or less, enabling you to conserve as much of your investment growth as possible.
It’s 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.
Check your investment options
Before consolidating your pensions, check which investment options are available on the plan you’re considering moving your savings to. 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 invests your money in riskier investments the longer you have to go before retirement, then gradually moves them into less risky investments such as bonds and cash as your retirement date approaches. However, there are often other funds to choose from, which might be more appropriate for you.
Self-invested personal pensions (SIPPs) typically offer the widest range of investments, but these tend to suit more experienced investors who are comfortable picking and monitoring their pension investments. If you’re not comfortable doing this, either a standard personal pension or a stakeholder plan which has capped charges and flexible investment limits may be better options.
If you’re not sure which type of plan to choose or which investment options are right for you, a financial adviser will be able to recommend a pension which offers suitable funds for you based on your approach to risk and your investment timeframe. They will also be able to arrange the pension transfer on your behalf.
Bear in mind that when you do transfer your existing pensions to a new plan, this will involve selling your pension investments before your money can be invested in your new plan, so you will be ‘out of the market’ while you transfer. If markets fall during this time, you won’t be hit by any losses, but if they rise, you won’t benefit from any investment growth.
Are there 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.
Again, an independent financial adviser will be able to work out the impact of any exit penalties on the value of your retirement savings and recommend whether or not you should consolidate your pensions.
Weighing up the pros and cons
Consolidating your pensions can make it much easier to monitor how your money is invested, and to keep charges to a minimum. You’ll only receive one pension statement a year, showing the current value of your retirement savings, how much you’re paying in fees, and what sort of income you might end up with in retirement.
Having your retirement savings in one place may also make things simpler for you when you reach retirement, as you’ll only have to decide how to take an income from one pension pot.
However, it’s vital to consider whether you’ll be sacrificing important benefits when you move and if you’ll be charged to transfer. If you have several pensions and you’re not sure whether consolidating them is the right choice for you, talk to an adviser who can suggest the best course of action for you.
Capital at risk. Past performance is not a guide to future performance. This website does not constitute personal advice. If you are in doubt as to the suitability of an investment, please contact one of Profile Pensions’ advisers. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change.
Telegraph Media Group Limited is an Introducer Appointed Representative of Profile Pensions, a trading name of Profile Financial Solutions Limited, which is authorised and regulated by the Financial Conduct Authority. FCA Number 596398. Registered in England & Wales, Company Number 07731925. Registered office address: Norwest Court, Guildhall Street, Preston PR1 3NU.