What Is Pension Consolidation?

There are very few jobs for life these days. With many of us having multiple employers throughout our working career, the introduction of auto-enrolment pensions means people are more likely to have multiple pensions, and keeping track of all our pension funds can be challenging. If this is the case for you, it might be tempting to consolidate pensions. But what is pension consolidation, and is it a good idea to consolidate your pensions? Hilltop answers all your questions here. 

What Does It Mean To Combine Pensions?

So what is pension consolidation? Well, when you consolidate pensions, you combine two or more pensions. Also referred to as ‘merging pensions’ or ‘transferring pensions’, a pension consolidation brings multiple disparate pension funds (which many of us have after moving around employers and/or setting up private pension schemes) into one manageable fund. The benefits can be less admin, potentially lower charges and improved performance.

What Should You Check Before Consolidating?

Before merging pensions, the first thing to check is what pensions you currently have and where they are held. You can do that by visiting the government’s Pension Tracing Service, which can provide useful contact details to help you search for a lost pension. Then contact each provider to request their specific details of your pension. This will include your all-important value, effectively the amount of money in your pension pot. 

Should You Transfer Your Pension To Your New Employer?

It may be possible to transfer your pension into the workplace scheme of a new employer. However, the considerations mentioned above still apply. When you leave a job, the pension funds you have amassed are yours. So you can either do nothing, continue paying into that fund, or switch your pension to another provider (either your new employer’s scheme or a personal pension instead). 

Such a pension switch is usually allowed as long as you do it up to a year before retirement. Also, remember that, by law, any transfer from a defined benefit pension worth more than £30,000 requires independent financial advice before you do anything. 

The Benefits Of Pension Consolidation

Pension consolidations offer several distinct advantages, including:

Savings Overview 

As we mentioned at the beginning of this blog, keeping track of different pension funds can be challenging. A pension consolidation removes that barrier in one fell swoop. Bringing all your funds into one pot gives you much more visibility over your contributions and the overall value of your pension pot.

Performance Tracking 

Another significant benefit of merging pensions is that you will gain a much clearer insight into the performance of your pension investments. The ease with which you can monitor and track performance with a consolidated pension allows you to pinpoint any issues and compare performance with other providers.

Retirement Forecasting

Of course, the knock-on effect of gaining better visibility over your savings and investments is that you will be in a much stronger position to understand your potential income in retirement. As such, a pension consolidation can give you a firmer grasp of how your pension saving is progressing and whether you are on target. 

Greater Agility 

The upshot of being able to forecast your retirement income is that you can make the necessary adjustments required to boost your income and achieve your desired lifestyle. 

Are There Any Reasons Not To Combine My Pensions?

If you are considering a pension consolidation, the main point to bear in mind is whether a transfer will leave you better or worse off. Merging pensions is not advisable for everyone, so it is worth speaking with a regulated financial adviser before taking any such action. 

Before you decide anything, it’s important to consider the following:

1. Defined Benefit Pension

If you have a defined benefit (final salary) pension, your pension will deliver a guaranteed income for life that potentially rises with inflation. It may also provide other benefits, such as a pension for your spouse or partner when you die. As such, the FCAs stance is that it is inadvisable to transfer a final salary pension.

2. Early Exit Fees

With some older pension contracts, providers may have included an early exit fee to release your funds for a pension switch. You will need to weigh up the benefits versus the costs. If the costs seem prohibitive, especially in the case of a smaller pension pot, you might be well-advised to leave your funds invested where they are.

3. Management Or Withdrawal Fees

While it may seem more convenient to move pensions into one, it is worth checking the management fees involved before jumping ship. Most providers will charge an annual percentage of your pot, but some may also charge an additional monetary fee. These fees could seriously chip away at your nest egg.h3>

4. Safeguarded Benefits

Some pension policies include safeguarded benefits you may lose if you carry out a pension switch. A safeguarded benefit are benefits that are not a money purchase or a cash balance benefit. These could include a Guaranteed Annuity Rate or a Terminal Bonus. Speaking with a financial adviser can help you to identify any benefits and advise on whether it is in your best interests to switch this pension to consolidation. 

Is Combining Your Pensions Right For You?

So, should you combine pensions? Of course, this is a highly subjective question and one that only you can answer. However, it isn’t a decision you should take lightly and certainly isn’t one you have to make alone. 

In fact, given the importance of your pension and its impact on your future circumstances, we recommend consulting a financial adviser if you are considering a pension consolidation. Our experienced financial advisers here at Hilltop Financial Planning provide regulated, independent financial advice to help you make the best decision for your unique circumstances.

If you would like more information about pension consolidation or to arrange a consultation, please contact us on 0161 413 7051. We are open from 9 am to 5 pm Monday to Thursday and 9 am to 4 pm on Fridays. Hilltop Financial Planning is authorised and regulated by the Financial Conduct Authority.