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Should You Combine Your Pensions? Pros, Cons, and How to Consolidate your Pension Pots

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As people change jobs throughout their careers, the average Briton accumulates 10 to 12 different pension pots. Typically, employees in the private sector contribute to defined contribution (DC) pensions, with each employer creating a new pot for them. By retirement, these scattered savings can be challenging to manage.

Combining pensions, known as consolidation, is a popular solution. This guide covers the pros, cons, and steps to consolidate your pensions if you decide it’s the right choice.

Why Consolidate?

  1. Simplifies Management: Consolidating multiple pensions into one account makes it easier to track your retirement savings in one place. According to Ian Cook, a financial planner at Quilter Cheviot, fewer accounts mean fewer statements and a clearer view of your overall savings. Claire Trott of St. James’s Place adds that while consolidating each time you switch jobs may be tedious, it’s worth it for long-term simplicity.
  2. Improves Financial Discipline: Having one larger pot rather than several small ones can help manage spending. Helen Morrissey of Hargreaves Lansdown suggests that a single, larger fund encourages better planning for retirement income.
  3. Potential Fee Reduction: Providers charge fees for managing pensions, capped at 0.75% for default funds in auto-enrolled pensions. However, older pensions or actively managed funds may have higher charges. Former pensions minister Sir Steve Webb highlights that consolidating pensions with one provider can lower overall fees. Yet, beware of possible exit fees when transferring, which can reduce the cost-saving benefits of consolidation.

Downsides to Consider

  1. Loss of Unique Benefits: Some older pensions include “safeguarded” or “flexible” benefits, like guaranteed annuity rates (GARs), which promise a certain income level. Claire Trott advises that transferring could mean losing valuable benefits; consulting a financial advisor before transferring older pensions is crucial. Nick Flynn of Canada Life suggests obtaining a transfer value statement to identify benefits you’d lose before consolidating, especially for pensions over 25 years old.
  2. Defined Benefit (DB) Pensions: DB pensions, which provide a guaranteed annual income in retirement, are increasingly rare but highly valuable. Transferring DB pensions is generally not advised, says Craig Rickman of Interactive Investor, and regulated financial advice is required if the transfer value exceeds £30,000.
  3. Impact on Tax-Free Allowances: The “small pots rule” allows people to withdraw up to three pensions under £10,000 as lump sums without impacting their tax-free allowance. Consolidating these small pots can reduce tax-free benefits if you’re close to the £268,275 tax-free limit.

How to Consolidate Your Pensions

If you’ve decided to consolidate, here’s a step-by-step guide:

  1. Locate All Pension Accounts: Track down your pension pots using the Government’s Pension Tracing Service or free services like Gretel. This will give you an overview of what’s available for transfer.
  2. Choose a Destination for Your Pensions: Options include your current pension provider, a self-invested personal pension (SIPP), or another type of personal pension. Compare fees, benefits, and investment options before making a choice.
  3. Seek Financial Advice: If you’re unsure, a financial advisor can help you navigate fees, benefits, and tax implications, especially for older or defined benefit pensions. Specialized services can also help combine pension pots into one account for a fee.
  4. DIY Consolidation: While you can consolidate pensions independently, it requires careful decision-making. Craig Rickman warns that going solo might save money but comes with investment risks, so weigh this option carefully.

By evaluating both the costs and benefits of consolidation and seeking advice where needed, you can better manage your retirement savings and make the most of your pension pots.