If you've had a number of jobs over the years you are likely to have amassed a number of pension pots with various different employers. When you leave an employer and stop contributing to their pension scheme you don’t lose what you built up, but there could be a number of advantages in consolidating your various pensions into one.
Older employer pension schemes may have higher charges than your current one or a low cost self invested personal pension (Sipp).
Older pension schemes may not offer flexible ways to access your money at retirement, for example flexi-access drawdown, whereby after age 55 you take out what you want when you want. Withdrawals up to 25 per cent of the value of all your pensions are tax-free and you pay income tax on the remaining 75 per cent at whatever your rate is as a result of your total income for that tax year.
You can also take uncrystallised funds pension lump sums from some newer pension schemes from age 55. 25 per cent of each of these withdrawals is tax free and the remaining 75 per cent of each withdrawal is taxable.
Pension contracts from before 2015 may not offer these options, although some older schemes that are still open to contributions have introduced them. Older schemes that are closed to new business probably won’t have introduced these withdrawal options. So if you are in one of these and want to take out your money in one of the ways outlined above you would need to transfer it into a pension that does allow this. With such older schemes, after age 55 you could buy an annuity or in some cases enter capped drawdown where you can take income up to an annual limit.
More modern pensions may also offer a wider range of investment options, including funds with lower charges.
It can be easier to plan your finances approaching or in retirement if you have your pension money in one place – especially if you are planning to draw an income from it rather than buy an annuity. “This should give you more ongoing control over your investments, mean you can consider all of your pensions when making changes, and have a better understanding of the overall asset allocation and level of pension you are on target to achieve,” says Patrick Connolly, chartered financial planner at Chase de Vere. “You can also use consolidation as an opportunity to review your investment choices to make sure that you have the right overall strategy, aren’t taking too much or too little risk, and are investing in good quality funds."
Consolidating your pensions also means that you don't miss out on any pension pots that you have forgotten about or lost the details of. UK investors are estimated to have lost track of 1.6m pensions worth over £19bn, according to Canada Life. If you have lost details of a pension, the Pension Tracing Service can help you find it. You can get more information on this at https://www.gov.uk/find-pension-contact-details or 0800 731 0193.
Sipp or employer scheme?
If you consolidate your pensions into one account you could either transfer them into a Sipp or your current employer scheme, if you are still working. Firstly, you need to check whether your current employer scheme accepts transfers in, especially if it is an older defined benefit (DB) scheme. Transfers in are likely to be possible if your employer scheme is a modern defined contribution (DC) scheme, explains Andrew Tully, technical director at Canada Life.
Check the charges of your current employer scheme and how they compare to the type of Sipp you are also thinking of investing in. Some low-cost Sipps, especially if you have a larger-sized fund, may incur a similar level of charges to an employer scheme’s all-in cost, for example, of around 0.4 per cent. But a ‘full service’ Sipp, which allows you to hold a wider range of investments and maybe offers more options on how you draw it, is likely to cost more. And due to economies of scale some employer pension schemes have all-in charges as low as between 0.3 per cent and 0.4 per cent.
Which type of pension you opt for also depends on what you plan to do with it. For example, do you want a wide range of investment choices, including different types of securities or a direct investment in commercial property? If so, you are likely to need a full service Sipp as an employer pension scheme would be less likely to offer these options, in particular the latter. Newer pension schemes or Sipps might also provide better service, and the ability to check and manage them online.
So check what the cheaper option offers, and consider if you really want or need any of the added extras a more expensive pension offers. Also, if you are near retirement and move older pensions into your current employer scheme will you have to move again to do what you want in the near future?
But if you are still getting employer contributions into a workplace pension it is probably worth staying in this one to retain the benefit – even if you transfer older pensions that are not getting any contributions into a Sipp.
When not to consolidate
You may face a charge if you transfer out of a pension. If you are aged over 55 there is a cap on exit penalties of 1 per cent of the value of the money being transferred, but even at this level it could still be a significant sum. Check to see what your scheme’s policy is – especially if you are under age 55. “In some cases, it might be much cheaper to consolidate your pensions after you have reached age 55,” says Jon Greer, head of retirement policy & pensions technical at Quilter.
Some more modern schemes do not impose exit penalties or at least don’t have high ones, and recent research by the Financial Conduct Authority found that 8 per cent of non workplace pensions do not levy exit charges.
Some pensions offer benefits that you would lose if you transfer out such as guaranteed annuity rates which are far higher than those you could find on the open market. These were typically offered in the 1990s when annuity rates were much higher, meaning that you could get as much as double what you get today. This is a particularly relevant benefit if you are planning to buy annuities.
Or you could buy an annuity with the pension pot that offers a guaranteed higher rate and draw your other pension pots in other ways. “For example, some retirees want to secure a guaranteed level of income to cover essentials such as food and housing [via an annuity] and use other pension savings in different ways to cover discretionary spending,” explains Mr Greer.
Since 2006 you have only been able to take 25 per cent of pension money as as tax-free lump sum. But some contracts from before 2006 allow you to take out more than 25 per cent of that particular pension pot tax-free, in some cases much larger portions of it, for example, 75 per cent.
So before transferring out of older pensions check to see if they offer these valuable benefits.
If you are in a good older scheme with low charges it might make sense to stick with it – especially if the options you are considering transferring into are more expensive.
If you are in a DB pension in most cases it makes sense to maintain it because of features including a guaranteed income for life. “If you transfer out of final salary pension schemes to consolidate your pensions, you’ll be giving up guaranteed benefits which would be expensive to replicate elsewhere and taking on much greater investment risks,” adds Mr Connolly.
Before you transfer out of a defined benefit pension with a value of more than £30,000 you are legally obliged to take financial advice. But because getting your pension planning right can make such a difference to your income in retirement it may be worth getting advice before embarking on any kind of transfer. “Review all of your pensions and make sure that you understand the charges, terms and conditions for each of them,” says Mr Connolly. “This will give you a better idea of whether consolidation is a good idea.”
