Should I Consolidate My Pensions?
Consolidating your pensions, also known as pension consolidation, can save you a huge amount of money in the long run, but many people do not know how to even start the process.
Although this option saves many people money each year, this option might not be right for everyone. This article aims to explain pension consolidation, as well as the pros and cons, so you can evaluate whether or not it might be right for you.
What Is Pension Consolidation?
Pension consolidation is the process of transferring one pension to another, thereby combining them. This saves people money, time, and paperwork.
Job hopping is the new normal, with most people changing jobs 11 times in their lives. This means that most people have picked up several pensions over the course of their working lives, each with different providers.
Having so many pensions across many different providers makes it difficult to keep track of how each pension is performing, and how much you may be paying in fees. It also means that you will likely be dealing with a mountain of paperwork.
Pension consolidation can be a smart idea at any age, but it is particularly helpful for people who are planning to retire in the near future. Consolidating older pensions into a more modern one can allow you more flexibility with how much money you want to withdraw at retirement.
Pros of Pension Consolidation
Easier To Keep Track Of
If you merge your pensions into one pot, they are easier to review. You will have complete visibility over your money at just a glance, and you can keep track of their performance easily. Having just one pension makes it possible to quickly spot when it might not be performing too well, and to make changes quickly.
Some older pensions carry very heavy charges, which can chip away at your pension’s value over time, reducing how much you will have left by the time you retire. By switching all your pensions into a newer pension, you will avoid this.
How your pension is invested will determine its final value. Some pensions will only give you access to a very limited range of investment options, especially older-style pensions. Modern pensions are more likely to give you access to a larger range of investments.
The rules for pensions changed in 2015, allowing people to withdraw from their pension pots more flexibly. However, older pensions from before 2015 may not facilitate this flexible drawdown.
Why Shouldn’t I Consolidate My Pensions?
Final Salary Pensions
Final salary pensions, also known as ‘defined benefit pensions’, give you very valuable benefits such as guaranteed income for life that increase with inflation. If you have a final salary pension, you may not want to consolidate your pension, as this will lose you your benefits.
If your pension comes with valuable guarantees, this could mean you are eligible for guaranteed annuity rates, protected tax-free cash, or guaranteed minimum pensions. If you consolidate your pensions, these benefits will typically be lost, so you may want to check beforehand with your pension provider.
If your employer matches your pension contributions to a certain level, you may not want to transfer this pension to another pension. This will likely cause you to lose your employer-matched contribution.
However, you may be able to combine other pensions with this pension. It could be worth checking beforehand with your workplace pension provider whether you are allowed to transfer to other pensions.
Some pensions will charge you an exit fee if you decide to transfer pensions away. The exact amount and terms of these fees will depend on your pension providers, and the rates will vary.
This article has been published in accordance with Socialnomics’ disclosure policy.