It’s common for people to get in touch with me looking for advice on whether to combine their pensions. They’ve got to the stage in their careers that they have moved jobs a number of times and in that time accumulated different pension pots, all of them with differing values and with different providers.
This has led to uncertainty over what they have, what each one is worth and what income it all might provide in retirement. It’s not uncommon for there to be a vague recollection of a pension from a job many years ago but no details of who the pension provider is. In such instances, the pension tracing service can be of help.
As I have written in this article, comparing pensions based on how they performed can be misleading but there can still be reasons to bring some pensions together. You do not have to combine every pension:
- It provides clarity on your pension saving. You can more readily identify how much you have accrued towards your retirement savings to get a sense if it is likely to be enough.
- A more appropriate investment approach. Review whether your current investments suit your risk tolerance, retirement plans and need for income. A different fund range may help, but a pension’s age or recent performance alone does not justify transferring.
- High Charges. The older the pension contract the higher the chance that the charging structure is complex and costly. Old pension contracts often have varying costs: admin charges, annual policy fees, fund management costs, increased charges when regular contributions ceased and a cut taken every time a contribution was invested (known as the bid/offer spread). The introduction of Stakeholder pensions with their single charge requirements and a price-cap redressed the balance to the benefit of the policyholder but anyone with older funds may find that their funds are being held back by high charges.
- Understanding with-profits values. Ask for a current transfer quotation showing any terminal bonus and market value reduction. Compare it with benefits and guarantees you would retain by staying. A bonus alone does not establish that transferring is worthwhile.
- Taking an income. Some older pensions do not offer the flexible withdrawal options introduced in April 2015. Transferring a suitable pot may give access to drawdown. Check the existing options first. Read my pension drawdown guide for the planning considerations.
- Death-benefit options. Schemes differ in how beneficiaries can receive remaining pension money. Check the current and proposed arrangements, including beneficiary drawdown, before moving. Keep your beneficiary nomination up to date. Tax treatment depends on the circumstances. From 6 April 2027, most unused pension funds and death benefits will come within Inheritance Tax, subject to exemptions.
However, whilst there are many reasons to consolidate your pension pots there are also reasons why it might not be a good idea.
The Arguments Against Consolidation
- Competitive existing charges. Some older or workplace pensions offer good value. Compare total costs, including administration, investments and any advice, in pounds and percentages. A fund’s ongoing charges figure, or OCF, is not the total cost of the pension. My pension charges article explains the different layers.
- Protected tax-free cash. You can usually take up to 25% of a pension as tax-free cash, subject to your available lump sum allowance. The standard allowance is £268,275 across your pensions, although protections can increase it. Some older plans allow more than 25%. A transfer can affect protection, so obtain confirmation before proceeding. Read my tax-free cash guide.
- Transfer costs and adjustments. Ask the provider to confirm any exit charges and adjustments to the amount available to transfer. With-profits policies can have market value reductions, and some contracts have other deductions. Use a current quotation and compare any cost with the expected benefit of moving.
- Guaranteed growth rates. Some policies include guarantees with conditions about when and how benefits are taken. Ask for the written terms and the value that would be lost on transfer. Consider how the guarantee fits your retirement needs.
- Guaranteed annuity rates. An older policy may offer a valuable guaranteed rate for converting your pot into income. Compare it with a current quotation on matching terms, including retirement age, increases and benefits for a partner. Check any conditions before giving up the guarantee.
Other checks before combining pensions
Check whether moving an active workplace pension would affect employer contributions. Ask about any protected pension access age. The normal minimum pension age generally rises from 55 to 57 on 6 April 2028, with exceptions and protections. Small-pot withdrawal rules may also be relevant before combining a small pension with a larger one.
A Word on Defined Benefit (Final Salary) Pensions
Most of this article concerns defined contribution pensions. Defined benefit pensions promise retirement income under scheme rules, often with increases and dependant benefits. Those increases may have limits.
Transferring to a defined contribution pension gives up those promises and transfers investment and retirement-income risk to you. For most people, keeping defined benefits is the better course. Some schemes do not permit this type of transfer.
If safeguarded benefits are worth more than £30,000, regulated advice is normally required before transferring them into flexible benefits. The adviser needs the appropriate pension-transfer permission. My article on final salary pension transfers explains the risks.
If you are thinking about transferring any pensions, none of the above factors should be taken in isolation. A thorough review of the advantages and disadvantages should go hand in hand with a planning exercise. Are you on course to have enough retirement income when you need it?
Deciding to move your pensions without that context may feel like you are doing something useful, but it can miss the bigger question. My guide to working out how much is enough will help you make a start.
If you would like to consider your pension strategy contact me here: www.neliganfinancial.co.uk/contact-us.
Andrew Neligan is a retirement financial planner in East Devon who helps individuals and couples in their 50s and early 60s plan their transition into retirement and create sustainable retirement income
Photo by Louis Hansel on Unsplash
