Pension Consolidation: Should You Combine Your Pensions?
By Georgia Holmes
Discover how pension consolidation works, its potential benefits and risks, what to check before transferring old pensions, and how to decide whether combining your pension pots is right for you.
Have you changed jobs several times throughout your career? If so, you could have pension savings scattered across multiple providers, each with its own charges, investment strategy and paperwork.
Keeping track of several pensions can make it harder to understand how much you have saved and whether you are on course for the retirement you want. Pension consolidation could help you bring your retirement savings together, simplify your finances and potentially reduce costs.
However, combining your pensions is not always the right move. Some older pensions include valuable guarantees or benefits that you could lose permanently if you transfer them.
So, what is pension consolidation, how does it work, and how can you decide whether it is right for you?
What Is Pension Consolidation?
Pension consolidation is the process of transferring money from two or more existing pension schemes into one pension plan.
For example, if you have worked for four different employers, you might have four workplace pensions sitting with separate providers. You may be able to transfer some or all of these into a single pension, making your retirement savings easier to manage.
You do not have to combine every pension you own. You can consolidate selected pots while leaving others where they are, particularly if they offer benefits that would be lost on transfer.
Pension consolidation is usually considered for defined contribution pensions, where the value of your retirement savings depends on contributions, investment performance and charges. Defined benefit pensions, such as final salary schemes, work differently because they promise an income based on factors such as your salary and length of service.
Understanding what type of pension you have is an essential first step before deciding whether to transfer it.
What Are the Benefits of Pension Consolidation?
Combining pensions can offer several advantages, depending on your existing arrangements and the pension you transfer into.
Reduce your pension charges
One reason people consolidate pensions is to reduce the amount they pay in fees. Older pension plans can have relatively high annual charges or additional policy fees. A newer pension may offer lower charges, although this is not guaranteed.
Even a small difference in annual fees can have a meaningful effect over time because charges reduce the amount of money left invested and available to grow.
For example, consider a pension worth £100,000. If the annual charge is 1%, you would be charged £1,000 per year. A newer pension might have an annual charge of 0.3%, meaning you would only be charged £300 annually.
These figures are illustrative and exclude investment growth and other possible fees. They show why comparing the total cost of your existing pensions with a potential new arrangement is worthwhile.
However, do not focus on charges alone. A pension with a higher fee might offer valuable guarantees, investment options or other benefits that could outweigh the potential savings from transferring.
Make retirement planning easier
Having several pension pots can make it difficult to see the bigger picture. You may receive statements at different times,…