Tax treatment depends on your circumstances and is subject to change
Bringing all your pension funds together to make one big pot could make saving for your retirement a lot more manageable, make older stray pension pots visible and possibly make your overall funds perform better in the long term. But are there negatives to consolidating that need to be taken into account?
Taking an active interest in your pension fund as early as possible in your working career could save you a whole lot of disappointment and possibly monetary loss. But in the 21st century, occupational pensions (those pension funds which your employer sets up for you) fundamentally ask for little active input from yourself.
The fund and provider are chosen for you and your contribution is taken out at source while you happily live on your net pay. An easy system for the employee it may be, but when there is a need for monitoring or response to life changes, long-term savings such as pensions can tend to get forgotten.
At the same time, few people in the 21st century remain in one job for the whole of their careers. They are likely to work for many different employers. In this way old funds from previous occupations can get lost. Nobody’s going to be knocking on your door reminding you that you have a lovely lot of money stashed away. If you do not get it yourself, you will lose it.
The Association of British Insurers (ABI) found that of 1.6 million savers – £19 million in savings is likely to go missing. Their data also found that the average pension was £13,000. So right from the offset it is important to keep track of where you are saving your money for your retirement: the provider, name of fund; reference details and contact details. If you move jobs, you know where your previous funds are.
Keeping these funds front of mind also reminds you to pass on changes in your life to your pension provider. For instance, if you move home, your provider is going to need your new address to forward yearly fund performance reports.
However if you are in the position where you have not kept a track of previous pension funds, there are useful sites online which can help you track old pots down.
Ok, so you have tracked down old pension funds. What will you do with them to ensure they continue offering an investment. What are the advantages and disadvantages of considering consolidation?
Management
Management of your retirement savings is going to be a whole lot easier. You will have one provider, one set of contacts and one fund to monitor.
Better performance
Some funds you have may not be performing well, and so by moving them to one fund may help your money grow faster and better. Also don’t forget that each of your pensions will have a set of fees, so it follows that the less funds you have, the less fees you are likely to have to pay.
Bear in mind that all funds come with a myriad of specific benefits and unique regulations so it is always advised you take the advice of a regulated financial adviser before moving your savings around.
No lost pension funds in the future
By keeping a track of your pension(s) throughout your career, you are less likely to lose the odd pension which may occur when you move jobs. Consolidating all of your funds together makes that likelihood even less.
Access your pension more easily
If you do consolidate, it is likely you will be creating a fund with contemporary regulations. That means they will necessarily reflect changes made in 2015 (Pension Freedoms Act). This Act allowed UK citizens to access their pensions from the age of 55. However, not all funds – even modern ones – allow for access – so be sure to check this out before making changes for this reason.
There can be clear reasons why it is not a good idea to consolidate and we will quickly summarise them here.
Risk to your investment
All pension funds are unique and therefore may offer benefits specific only to them. So even though it may appear that a fund is struggling overall, it is important you consider all the benefits included in the plan before you let it go.
For instance, if a fund promises a guaranteed income (final salary pension – see below) on retirement, it is probably worth holding onto. Some employer pension schemes may come with the benefit of being able to withdraw more than 25% tax free cash; some schemes may come with built-in insurance cover. Make sure you understand all the benefits of your pension plan before messing around with it. Again, a regulated financial adviser can be invaluable at a time like this.
If you have a final salary pension with your employer (defined benefit pension) then the benefits are very good. As well as a guaranteed income when you retire and inflation protection, you can also organise payment to be made to your spouse if you die after reaching the accepted pension age.
Again, consider how much you are likely to lose. These pension plans are usually worth holding onto.
Is there an exit fee?
With the current economic problems in the UK everyone is looking to switch to the most beneficial scheme or plan with any product or service. To deter this behaviour, many companies write huge exit fees into their plans. In other words, leaving the fund may negate all the benefits you will gain from moving your savings elsewhere. So check what it will cost to transfer your savings.
All funds performing well
This may sound obvious but if your funds are working well – why consider moving them elsewhere? You may be doing yourself no favours by moving a pension fund which has great benefits, is continuously showing strong returns, and overall growing at an acceptable rate.
Conclusion
There are many positive reasons for consolidating your pension funds. It may mean easier management, better performance and better benefits. But this is not guaranteed. An expert eye is often useful to determine whether letting a fund would be detrimental to your savings. At Pension Access, we can provide regulated financial advisers who can support you when exploring the complex world of pensions.
https://www.thetimes.co.uk/money-mentor/article/should-i-combine-my-pensions/
We can help you to make the best possible decisions when it comes to your pension.
Taking pension money early is not right for everyone as it will leave you worse off in retirement. Also, tax treatment depends on your circumstances and is subject to change. That’s why it makes sense to get help from a regulated specialist.
