If you are starting to plan your retirement, you may have found you have multiple pensions. In relation to this, you may have heard the term ‘pension consolidation’ but be unsure of the benefits and drawbacks of this. In this article we will answer ten of the most common questions we’re asked about pension consolidation.
What is pension consolidation?
Pension consolidation is the combining of multiple pension pots held with different pension providers into a single portfolio.
Why do people have multiple pensions?
Back in October 2012, the government introduced auto-enrolment into workplace pensions as part of the Pensions Act 2008. The purpose was to enable more of the working population to easily invest into pensions. Eligible employees and their employers invest a minimum total of 8% of the salary into the employer’s nominated pension scheme. You can find out more about auto-enrolment in our previous blog post.
If you leave the company, your employer contributions into that specific pension scheme cease. Assuming you are still eligible for a workplace pension with your new employer, you will begin contributing to a new pension pot. Inevitably, this means that employees who have worked for multiple employers since 2012 will have multiple pensions. Keeping track of each pension scheme’s details can be time-consuming and an administrative headache.
What are the benefits of consolidating pensions?
There are many benefits to consolidating your pensions into a single pension portfolio. For example, having your pension pots in one place means only one pension scheme’s details will need to be remembered. Also, each scheme will have management fees associated with it, some with higher rates than others. In consolidating your pensions into a single portfolio, you will pay a single management fee. By consolidating away from high-fee schemes, you could save more of your pension investment (usually the management fees will be taken from the pension pot).
The more you have invested in a pension, the greater the investment opportunities available to you. So, by consolidating into a single pension portfolio, you’ll have a larger fund. This will also enable greater growth* from compound interest, as the percentage return is based on a greater pension value. This is kept in the pension pot, and could generate future growth. For more about compound interest, see our previous blog post.
Is pension consolidation always a good idea or are there disadvantages?
For many, pension consolidation can be the solution you’re looking for. There are some things to consider, though. Your existing pension schemes will likely have exit fees. Before deciding to transfer out of schemes, you should calculate the exit fees that will be payable. For some, it may be more costly than beneficial to consolidate pensions.
If your pension scheme provider also offers additional benefits such as life insurance, these will be lost if you transfer the pension to a different scheme.
Should I consolidate a Defined Benefits pension?
Those with a Defined Benefit pension will receive a specific annual income guaranteed throughout retirement. How much you receive will depend on how long you’ve been part of the scheme, and your final salary. With private and workplace pensions, on the other hand, there is no guarantee of fund growth*. The amount you receive monthly is intrinsically linked to the performance of investments. It is unlikely to be worth consolidating away from a Defined Benefits pension.
How can pension consolidation impact your retirement?
In order to plan effectively for your retirement, you need to know, or at least estimate, your future financial situation. As previously mentioned, having multiple pensions can be difficult to keep track of. This could result in pensions being forgotten about, and funds going unclaimed.
Consolidating pensions means you can be sure of how much is available to you in your pension pot. You are then able to make decisions concerning whether you need to increase pension contributions now to enable you to enjoy the retirement you want.
As also aforementioned, consolidating away from pension schemes with high fees could increase available funds in retirement. Consolidation will therefore have a positive impact on your retirement.
How can I find my old pension pots?
It can be easy to lose track of pension scheme details, particularly if you have multiple pension pots. Not updating your pension scheme provider with your new address when you move house can lead to you losing track of your pension pot. This is because pension statements will be sent to your previous address. Additionally if your pension scheme provider has merged with another, you may not know who to contact for up-to-date information.
Latest data from Pensions UK shows an estimated 3.3million lost pension pots, with a value of approximately £31.1bn. This averages out to approximately £9.470 per lost pot. If you believe you have a lost pension, search your records for details of who your pension provider was. Contact them to gather the information about your pension you need, including pension value and account number.
Can I combine all my pensions into one portfolio?
It’s possible for some people to consolidate all pensions into one. However, if you have a Defined Benefits pension or an older pension with in-built guarantees, this may not be the best move for you.
Should I seek financial advice before consolidating my pensions?
We would always recommend contacting a financial expert such as Willday Wealth Management to discuss your pension consolidation options. This will ensure that you are making the right decision for you and your retirement. We’ll help you make sense of your different pension pots and help you find the right course of action for your individual circumstances.
How easy is the pension consolidation process?
If you decide to go ahead with pension consolidation give our expert team a call on 0116 222 0119 or email hi@willdaywm.co.uk. We’ll be happy to help and make the process as easy as possible for you. Simply give us the details of your pension scheme providers, policy numbers, pension value and valuation date. We’ll speak to your providers on your behalf and move your pensions to your Willday account. Contact us today to book an appointment with a member of your team.
We hope these questions and answers have helped you better understand pension consolidation. For many it can be a great way to retain more money in your pension portfolio, thereby having higher funds available for your ideal retirement.
*With investing your capital is at risk and you may get less than what you invested
