The theory of a job for life is now a pretty outdated thought, and as a result it’s likely you’ll approach retirement holding a number of pensions. But at what point does it make sense to combine them?
In 2012 the UK government introduced auto-enrolment pensions to help people better plan for their retirement. These rules mean that you automatically join your employer’s pension scheme, unless you opt out of it. And if you’ve lived or worked abroad you may be carrying pensions from a number of countries too. As a result, you could find yourself with something of a ‘mixed bag’ of pension pots, and some confusion over what this means for your retirement plans.
Thankfully it’s possible to transfer older pensions into one scheme with one provider, but deciding whether this is beneficial can be tricky. And you might not need to be approaching retirement to be considering whether to combine your pensions; you might be younger but are managing a number of pots or have spent time overseas and are now back in the UK.
Combining pensions
The key advantage of combining pensions is that you’ll be able to hold all of your retirement savings in one place. As a result, it’s usually easier to manage things, and have a clear idea of how big your pot is and what you might still need to save to keep your retirement plans on track. You’ll also eliminate the risk of forgetting a pension – particularly if it’s linked to a relatively short period of your employment history or if your contact details have changed. If you think you may have lost a UK pension along the way the best option is to use the pension tracing service provided by the UK government.
Benefits of consolidating pensions
There can be some compelling reasons to bring your pension pots together. One of the biggest drivers for doing so is to get a better sense of how your retirement plans are shaping up; you may even be able to retire earlier than you originally expected! Some of the main benefits for combining your pension pots include:
- More flexibility – older or more traditional pension schemes could leave you with limited options when it comes to retirement. Modern options have greater flexibility and choice, and you may be able to access your pension much earlier too.
- Greater control – one pension with one provider is a much simpler setup to manage, and avoids you potentially losing smaller pensions along the way.
- Lower fees – administration charges on multiple pensions can add up, and some providers can be much more expensive than others. Consolidating things into a single provider can stop fees eating into your savings so it’s worth reviewing your providers and taking any charges you pay into account.
- Reduced admin – if you have multiple pension plans it can be time-consuming to manage what you have, and where it is. By choosing one provider you can usually reduce the amount of admin or even move to a digital or app-based option. This might also ensure you can see in an instant how your pension is performing.
- Increased investment potential – some older schemes may have limited investment options, which ultimately could mean that your pension isn’t working as hard as it could be. Taking advantage of modern and flexible options can help you get the most from your pension savings.
Reasons not to combine your pensions
There are some situations where it might not make sense to combine pensions including:
- Final salary schemes – if you have a final salary pension (sometimes called a defined pension benefit) you’ll have a guaranteed income with inflation increases built in. It is likely to make better sense to stay in the scheme as it will give you a clear picture of your retirement income. Your scheme is also likely to provide for a surviving spouse if you pass way before reaching pension age.
- Good performance – your pension may be performing well and delivering what you need it to. In this situation it might make sense to keep your pension where it’s already working well.
- Loss of benefits – some pension schemes include attractive benefits, such as guaranteed annuity rates, protected pension age or critical illness cover, which you could lose if you transfer.
- Exit fees – if you will have to pay a significant amount to exit your pension, you’ll need to consider whether the penalty is worth it. It will be important to carefully compare the long-term impact of, for example, the exit fee versus the savings on your annual fees.
An international view
There are a couple of additional considerations to your pension planning if you live or work overseas. Firstly, you can only contribute £3,600 each year for a maximum of five years if you are non-resident in the UK, and you would need to have a pension scheme set up and in place before moving abroad. However when you return to the UK (and where your UK earnings allow), you should consider making higher levels of pension contributions to help boost your funds.
Next steps
If you’re considering whether to combine your pensions, it can be useful to chat through your plans with an expert who can review your financial situation, plans for the future and existing pension pots. And don’t forget that if your pension amounts to more than £30,000 the law states that you must take appropriate financial advice before making any decisions about transferring it.
To discuss any aspect of your finances, including investments, please contact your nearest office.
