If you have multiple pension pots, should you bring them together into a single pot? This approach – known as pension consolidation – is a common way to simplify a retirement plan, making your investments easier to manage. Yet how does consolidation work? What are the precise benefits, and is it in everyone’s interests? In this guide, our financial planner here at Vesta Wealth offers some answers for the 2022-23 tax year.
Suppose you work for 5 years as a school administrator, building up a pension via a workplace scheme. When you later change jobs, your pension savings stay with the scheme (unless you choose to move them). In your new role, you begin a new pension under your new employer’s scheme. Over a working life, therefore, it is common for an individual to build multiple pension pots – perhaps a dozen or more. Many people forget about old pensions they have built up, too.
Pension consolidation is the process of tracking down all of these pension schemes and putting everything – or a significant portion of the funds – into a single pot. This typically (but not always) means opening a personal (or “private”) pension which is independent of any of your employers.
Naturally, managing one pension pot is far easier than managing, say, twelve. This means only dealing with one provider and reduces time spent on communication. It also reduces confusion. Since your different schemes are likely to have different rules, you are more likely to mistakenly assume that they operate the same way.
For instance some pensions, particularly very old contracts, may not allow you to take your pension flexibly and it can be difficult to know how you can access your benefits. This can make it difficult to plan your income in retirement, something our financial planners can help you achieve in a tax-efficient manner.
With one pension pot, fewer decisions are required and you may even be able to reduce your costs. Perhaps your new provider offers lower management fees on investment funds compared to your old scheme(s), for instance, which can improve your “real returns.” The new scheme may also offer more flexibility and control over your investments. Maybe your old scheme did not let you invest in certain countries, for example, whilst your new one does.
On death, your new scheme may also offer better “death benefit” options to your loved ones – such as more favourable income and/or wealth transfer options.
Pension consolidation is not right for everyone and there are some risks to consider with a financial adviser. Firstly, certain older schemes may be worth holding onto. In particular, if you have a final salary (or “defined benefit”) pension from previous employment – e.g. teaching – then it is usually best to keep it. These are commonly called “gold plated” pensions due to the prestigious, hard-to-replicate benefits they offer (i.e. a guaranteed, inflation-linked retirement income). Whilst some people may benefit from a pension transfer, the FCA says most will not.
Secondly, some pension schemes do not make it easy for you to leave. In particular, they may impose costly “exit” fees for transferring your funds to a new provider. Here, it can still be worth consolidating if the financial benefits outweigh the penalties from your old scheme. However, it is not always viable. Thirdly, if you are in poor health and die within two years of a transfer, then HMRC may value it for IHT purposes and add it to the value of your estate (pension pots are normally exempt). To avoid this, it is important to try and perform any consolidation whilst you are in good health.
Finally, it is wise to ensure you are not discarding any valuable benefits from your old scheme before transferring – or, at least, to ensure you are comfortable with losing them. For example, your current scheme might offer a “guaranteed annuity rate” which is more attractive than the rates offered in the wider annuity market in 2022.
Due to potential drawbacks mentioned above, it is common for people to consolidate some (or most) of their old pension schemes – but perhaps not all of them. The precise strategy which is best for you will depend on your financial goals and priorities, your investment risk appetite and horizon, the number/types of your old schemes and the precise benefits they offer compared to those available with a potential new provider. These are quite difficult issues to work through on your own, and many people therefore benefit from professional financial advice to help navigate the complexities and arrive at informed decisions.
The good news is, you can consolidate your pension pots at any time, whilst continuing to save towards your retirement. You can start withdrawing from age 55 under the UK’s Pension Freedom rules (set to rise to 57 in the future), and up to 25% can be taken tax-free. However, consider speaking to a financial adviser before accessing your retirement savings to ensure you can sustain your lifestyle and avoid running out of money.
If you would like to discuss your financial plan and retirement strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
e: [email protected]
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
May 17th, 2022