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Capital at risk. All investments carry a varying degree of risk and it’s important you understand the nature of these. The value of your investments can go down as well as up and you may get back less than you put in. Where we promote an affiliate partner that provides investment products, our promotion is limited to that of their listed shares & shares investment platform. We do not promote or encourage any other products such as contract for difference, spread betting or forex. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing which may affect the value of the investment in sterling terms. You could lose money in sterling even if the share price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK. Accurate at the point of publication.
Consolidating pensions into one pot can make it easier to manage your pension, from having more choice over your investments to paying lower fees.
The introduction of auto-enrolment in the workplace has led to a rise in the number of employee pensions. Almost 80% of the workforce are now enrolled in workplace pension schemes in the UK, according to the Office for National Statistics.
And almost two million individuals also hold a Self Invested Personal Pension (SIPP) outside of workplace schemes, according to the Financial Conduct Authority.
As a result, people may find themselves with a number of pension pots if they change jobs regularly.
Let’s take a closer look at what you should know about consolidating your pension pots.
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Why consolidate your pension pots?
There are some advantages to consolidating several pension pots into one:
- administration: pension schemes can involve a lot of paperwork and having a single provider can reduce the time spent on administration
- fees: fees can vary widely by provider and consolidating your pots into one provider can help save fees. Higher-value pension pots may also qualify for lower percentage-based fees (if fees are tiered by portfolio value)
- monitoring: it’s easier to monitor the performance of one pension than it is multiple pots, and makes it easier to see the overall split of investments
- choice of investments: moving workplace schemes into a personal pension such as a SIPP may provide you with more control over the underlying investments. In addition, some providers have better-performing pension portfolios than others
- flexibility on retirement: some of the newer pensions provide a wider range of options on retirement, such as flexible drawdown
- lost pensions: consolidating your pension pots may reduce the risk of losing track of pensions from changing jobs or moving house. According to the Pensions Policy Institute, around 1.6 million individuals in the UK have ‘lost’ pension pots worth £19 billion, with an average of £13,000 per missing pot.
What are the disadvantages of consolidating pensions?
Pensions are a complex area and it may not be beneficial to consolidate pension pots in some situations.
In the first instance, you should seek advice from a qualified pension adviser. For certain transfers, including final salary scheme transfers over £30,000, you will be required to seek independent financial advice before the transfer can be made.
These are some of the things to consider before deciding whether to consolidate your pension:
- fees: some providers charge an exit fee if you transfer out your pension
- loss of benefits: some pensions provide valuable guarantees such as guaranteed annuity rates or enhanced tax-free lump sums, known as safeguarded benefits. These will typically be lost if you consolidate your pension
- final salary schemes: these provide a defined income on retirement, based on known criteria (such as a multiple of the individual’s salary at retirement). These schemes have become less commonplace because of the guarantees involved, and have been replaced by defined contribution schemes, where the accumulated fund depends on investment performance. It is generally not recommended to transfer out of a final salary scheme
- employer contributions: many employers match employee contributions (subject to a limit) and you may lose their contributions if you transfer out a workplace pension.
What’s the process for consolidating pensions?
The first step is to contact your current pension providers and ask for a transfer quote. This will include the value of your pension for transfer purposes and any exit penalties. You should also check if there are any safeguarded benefits (as mentioned above).
The next step is to decide whether you want to consolidate your other pensions into an existing workplace or personal pension provider, or move to a new provider.
You will then need to contact your new or existing provider to request the transfer of your other pensions. This can often be done online or, if not, by post or over the phone. The provider should manage the transfer on your behalf, which typically takes between four to eight weeks.
Alternatively, a financial adviser can manage this process for you. They should provide a review of your existing pension schemes and advise you whether consolidation is the best option for your circumstances.
An adviser will, of course, charge a fee for the work undertaken. You should be made aware of the fee structure and likely amount ahead of giving the green light for the work to proceed.
How can you find lost pensions?
The government offers a free pension tracing service to locate missing workplace or personal pension schemes. You will need to enter the name of your previous employer or personal pension provider.
The service will provide contact details for the pension provider but will not confirm whether you have a pension with the provider.
Alternatively, some pension providers and financial advisers also offer a service to trace missing pensions.
How do Self Invested Personal Pensions work?
One of the common reasons for consolidating pension pots is to have more control over the underlying investments. There are two main options on offer:
- Personal pensions: these are offered by many of the large providers such as Aviva and Legal & General. Individuals can typically choose from a set of managed portfolios, often categorised by risk and the likely option on retirement (whether buying an annuity or leaving funds invested for flexible drawdown).
- Self Invested Personal Pensions (SIPPs): as the name suggests, these are a type of personal pension that gives more flexibility over the types of investments. Depending on the provider, investors may have a wide range of funds, shares and other investments to choose from.
We’ve produced a detailed guide to the different types of pension, along with a review of the providers, in our pick of the best personal pension providers and SIPP providers.