Should I combine my pensions?

Should I combine my old pensions?

If you've accumulated numerous workplace pensions over the years from different employers, it can be difficult to keep track of how they are performing. 

Given that workers will have an average of 12 jobs during their working life, many people end up with a large number of relatively small pension pots, making it challenging to keep up with them all.

There is a danger that long-forgotten plans will end up festering in expensive, poorly performing funds, and the paperwork and various log-ins can be enough to put you off becoming more proactive.

A pension transfer or combining all of your pensions could see you moving your money to a new home with another provider. The main reasons to switch will be to reduce the charges on your scheme, particularly if you've an older plan with high fees, or to access different investment options.

The other main strategy is to consolidate all your retirement savings in one place, perhaps to make managing your pensions easier. So, is transferring everything into one easy-to-manage pension the way to go?

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What happens to my pensions if I change job?

Making the most of your pensions now could have a significant impact on your happiness in later years; getting it right could mean a higher income and a comfortable retirement, or even an earlier date when you can stop working.

If you're lucky enough to be in a final salary scheme, it will almost always make sense for the money stay put, even if you've left the scheme.

If you have any other type of workplace pension - where success or failure depends on the performance of your investments - consolidation is worth considering.

With pension auto-enrolment, your employer is obliged to enrol you into a scheme (which you can then opt out of).

The pension won't automatically follow you if you switch employers. Savers can end up with a separate pension plan from a different provider each time they start a new job. Having multiple pots is becoming more of an issue and is currently being considered by regulators and the industry.

You can leave your old pension where it is or you can move the funds into your new employer's workplace pension scheme.

A pension can therefore follow you throughout your working life and you can switch it as many times as you move jobs, although there may be costs for moving your money.

The impact of high charges on your pension schemes

The negative effect of high charges should not be underestimated. This should guide your decision on where to leave your pension savings.

If you had two separate workplace pension pots of £100,000 each at age 40, one with a fee of 0.75% and the other with a charge of 0.25%, after 20 years you'd have a considerably bigger fund if you merge the pensions into the scheme with the lower charge.

Assuming total contributions of 8% per year and annual investment growth of 3%, merging the pensions would give you £441,792 after 20 years compared to £424,218 if you'd kept the pensions separate and only paid contributions into the scheme with the management fee of 0.25%.

A better return will depend primarily on investment performance, but lower fees will give you the best chance of your funds growing.

If you're interested in consolidating, a personal pension, such as a self-invested personal pension (Sipp), can provide a huge amount of investment choice at a relatively low cost.

And if you're not comfortable tackling big decisions on your own, an independent financial adviser can help.

How do I combine my pensions?

As a starting point, contact your current pension provider to get confirmation of how much your pension is worth (the ‘transfer value’), the terms and conditions of your scheme, and details of any exit fees. Make sure you check whether there are any benefits you would lose by transferring away.

If you decide to go ahead, you’ll need to contact the provider you want to move to. It will give you an application form to fill in and will manage the transfer on your behalf. 

There are two ways in which you can transfer your pension funds: either your old provider sells your investments and moves your money in cash, or the existing investments are moved across as they are (known as an ‘in-specie’ transfer).

Your existing company must move your pension within six months of the start of the transfer process. The clock won’t start ticking until it has received all the correct documentation.

The pros and cons of combining your pensions

Deciding whether to combine all of your pension pots isn't a straightforward decision. There are clear advantages and disadvantages:

Pros:

• Keeping track of and managing your pension savings is easiest with just one scheme - the convenience of having only one pension will better enable you to make decisions
• You'll pay less in overall charges if you put your money into a pension with competitive fees compared to plans with high charges
• You could gain access to a greater choice of investments if you're consolidating your pension pots into a Sipp. Costs also tend to be lower than workplace schemes
• Consolidating your pensions into one scheme can make things simpler when you come to access your money at retirement. For example, not all providers will allow you to convert your pot into pension drawdown

Cons:

• Opting to use the transfer value to shift money out of a final salary pension is usually a bad idea
• Some schemes will still have exit penalties, so switching your money out will deplete the size of your pot
• Older pots may have some attractive features that you'll lose if you transfer out, eg early access, more than 25% tax-free cash or guaranteed annuity rates

Questions to ask before moving your pensions

Once you’ve weighed up the pros and cons of consolidating your pensions, it’s worth asking a few final questions before you begin the switch.

Am I in danger of being scammed? - A transfer may sometimes be paused if a red flag is raised by your provider or trustees. A red flag indicates a significant risk of a scam. An example is where the individual has been persuaded to make a transfer following a cold call or other unsolicited contact. Never seek to transfer your fund to a company that you know little about. 

What am I paying in charges?  - Moving your pensions can be a good way to reduce charges  and ultimately boost the value of your pot. Start by checking the charges you’re currently paying: if you aren’t able find out these figures from your annual statement or via an online portal, contact your scheme administrator or pension provider directly

Is my annuity rate guaranteed? - Some DC pensions from the 1980s and 1990s had a guaranteed annuity rate (GAR), which will be higher – sometimes around double – than what’s available on the rest of the annuity market. If you have an older pension, check with your provider to see if it includes a GAR. If so, you’re likely to better off leaving your money where it is.

How much is my pension worth? - Taking money from your pension usually triggers the Money Purchase Annual Allowance (MPAA), which limits the amount you can pay into your pension and still get tax relief to £60,000 a year. But for pots worth less than £10,000, you can withdraw this money in full without it affecting the MPAA. If this is beneficial to you, it may be better to leave these small pots untouched.

Will I have to pay an exit penalty? - Some older pensions still apply exit charges. You will need to weigh up these charges against the potential savings you will make from moving to a lower cost scheme.