If you have accumulated several pension plans having worked for different employers over the years, it can be difficult to keep track of your retirement savings and plan for a secure retirement.
We often meet with clients who’ve amassed several pensions throughout their working lives with them all performing differently with varying fees, benefits, income options, etc. In short, gaining clarity on your retirement nest egg and understanding if what you have is fit for purpose can pose a serious challenge.
What is pension consolidation and why might you consider it?
Pension consolidation, or combining your pensions, is the process of merging some or all your existing pensions into a single plan. It can simplify pension management, potentially reduces fees, and provides a clearer picture of your retirement savings. However, it’s not a one-size-fits-all solution. There are important factors to consider before making any decisions.
In this article, we’ll delve into what pension consolidation is, its pros and cons, and how to determine if it’s the right move for you.
What are the benefits of consolidating your pensions?
Reducing fees: Pension plans normally have different types of fees, such as administration fees, fund management fees or exit fees. These can eat into your savings and reduce your returns over time.
By combining your pensions into a lower-cost scheme, you might be able to reduce the fees you pay and increase your pension pot.
Most pension providers offer a discount when your plan grows in size. Therefore, consolidating your pensions into one plan may allow you to benefit from a discount, which can reduce your fees.
It is important to note that, the lowest cost pension is not always the best option.
A clearer overview: Having multiple pension plans can make it hard to keep track of how much your pension savings and how your investments are performing. You might also lose some pensions if you change jobs or move house.
By consolidating your pensions into one scheme, you can gain a clear overview of your savings and monitor your progress towards your retirement goals.
Simplifying your retirement planning: Each scheme might offer different income options. For example, some may only allow you to take the whole plan as a lump sum or a fixed income for the rest of your life, whereas others allow you to take as much or as little as you need.
By combining pensions into one scheme that offers the full suite of income withdrawal options, you can have more flexibility and control over how you access your pensions.
Improving investment performance: Solid investment performance can make a huge difference to your retirement prospects, which is why this is a key consideration for most.
Some pensions can be hindered by a limited range of investment options or a default fund that might not suit your risk profile or objectives. By consolidating your pensions into a plan with a wide range of investment options, you can choose a strategy tailored to your needs and increase your growth potential.
You should always compare the investment options of your current plans and the pension you want to transfer to and see what suits you best.
What are the drawbacks and is it worth combining pensions?
Losing valuable benefits: Some pension plans offer valuable benefits or guarantees that you could lose if you transfer out. For example, some defined benefit schemes (also known as final salary schemes) might offer a guaranteed income for life, inflation protection, or death benefits for your dependents. Some defined contribution schemes (also known as money purchase schemes) might offer a guaranteed annuity rate, a cash bonus, or a higher tax-free lump sum.
You should check carefully what benefits your current plans provide and whether you would be better off keeping them.
Exit charges: Some pension schemes might charge you a fee if you transfer out. You should check if your current pension providers would charge if your transferred out, and whether it is worth paying the fee.
There are no performance guarantees: It is not a given that your new pension will perform better than your existing pensions.
When considering if it is better to combine pensions, it’s crucial to compare the past performance of your existing pensions with the one you’re planning to consolidate into. While past performance doesn’t determine future outcomes, it can provide valuable insights into how both pensions fared in different timeframes and situations, guiding your decision-making.
You may be inexperienced with investment risk and capital markets. In this case, you may wish to hire an experienced and qualified independent financial adviser to provide an in-depth performance analysis.
The hassle: Pension companies are not famed for outstanding customer service and efficient processes; gathering information about your existing pensions can be incredibly time-consuming.
If you consolidate your pensions without the help of a qualified financial adviser authorised to undertake this activity, the pension provider may require you to take some extra administrative steps before they complete the transfer. Whilst this might appear obstructive, it is for good reason: to help prevent the number of people being scammed with their retirement savings!
Important considerations before you combine pensions
Not all pensions allow transfers in: always check that the pension you intend to transfer the others to accepts transfers.
Pension tracing service: If you have lost track of some of your pensions, you can use the government’s free pension tracing service.
The pension tracing service provides the contact details of your pension providers. You can then contact them and ask for information about your pension schemes. Otherwise, there are free services such as Gretel.co.uk which can help you locate lost pensions.
Analysing your current pension schemes: You should gather as much information as possible about your current pension schemes to help you decide if it is worth combing pensions. Here is the some of the things we consider when analysing clients’ pensions and deciding if it is better to combine pensions:
- The type of pension scheme,
- The value of your pension plan,
- All ongoing fees and any exit fees
- Any benefits and guarantees
- The current investment solution and all other investment options available within the plan
- The performance of the underlying investments
- Income options at retirement.
- The terms and conditions of your schemes and see if there are any restrictions or penalties for transferring out.
- Death benefits of the plan
Comparing fees accurately: You should compare the fees of your current pension plans and the plan you want to transfer to. You should look at the total fees, not just the headline charges.
Special benefits: You should check if you have any special benefits or guarantees that you could lose if you transfer out. You should weigh the value of these benefits against the potential benefits of pension consolidation. You should also check if you have any special circumstances that might affect your decision, such as ill health, dependents, or debts.
How do I consolidate my pension?
There are two ways to do this:
- 1. Do it yourself – you can contact your current pension providers and ask them to transfer your funds to the plan of your choice. Outlined above are some things to consider before undertaking this
- 2. Hire a qualified financial adviser to take care of this for you. Here they should provide you with an in-depth analysis of your existing plans along with the pros and cons of consolidating your plans and all associated fees.
Working with Abode Financial Planning in Cirencester
Pension consolidation can be a complex and important decision that can have a significant impact on your retirement income and lifestyle. At Abode Financial Planning, we are experienced pension advisers and can help you decide if it is worth combining pensions.
Here’s how we help:
- Review your current pension schemes and assess their suitability for your goals and circumstances.
- Recommend the best pension scheme for your needs and preferences.
- Handle the transfer process for you and ensure that it is done smoothly and securely.
- Monitor and review your pension scheme regularly and make adjustments if needed.
- Provide ongoing support and guidance on your retirement planning and income options.
If you want to explore your retirement planning options further, please contact us today and book a free initial consultation.
Thinking about consolidating your pensions? Contact Abode Financial Planning today for a free initial consultation and expert advice on your retirement options
Investment risk information
Please note, the value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
This information is for general information only and does not constitute advice. The information is aimed at retail clients only.
Past performance is not necessarily a guide to future performance.
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Abode Financial Advisers is an Independent Financial Adviser in Cirencester.
Abode Financial Advisers is a financial adviser based in Cirencester, Gloucestershire. Abode Financial Planning is an independent financial advice firm offering comprehensive financial planning services, including: independent financial advice, retirement planning, pension advice, investment advice, wealth management, and inheritance tax planning.
If you wish to discuss your situation, contact us for a no-obligation initial call, held at our expense. Call us on 01285 703 060.
Abode Financial Advisers is located at Watermoor Point, Watermoor Road, Cirencester, Gloucestershire, GL7 1LF.