When should I consolidate my pensions?

If you have worked for a number of different employers you may have acquired a number of different pensions, most of which you and the employer no longer contribute to. If these are defined contribution (DC) schemes, in some cases it can make sense to consolidate most or all of them into one pension. 

“It is a lot easier to have one pension plan if you want, for example, to make adjustments such as changing your retirement age or name if you get married,” says David Gibb, chartered financial planner at Quilter. 

If you have a number of pensions, it is inevitably harder to keep track of them, their performance and any changes, and your overall retirement savings position and ability to generate the amounts you need.

On top of this, some older pensions contracts cannot facilitate income drawdown. So if you plan to draw your retirement funds in this way, you would need to transfer these into a scheme which has that flexibility. Nor do all pension plans facilitate phased drawdown in the form of an uncrystallised funds pension lump sum. This is where you make a number of withdrawals, of which 25 per cent is tax free each time. “If you do not need to take all of your tax-free sum in one go, it can work well to draw from your pension in this way,” says Gibb.

Some older schemes restrict the option of taking tax-free cash. And some don’t allow for the pension pot to be passed onto beneficiaries after you die, or else restrict the way in which they beneficiaries can take benefits. For example, they might stipulate that the pension must be taken as a lump sum within two years of your death rather than via nominees’ drawdown.

“If these options are important then consolidating into a more modern plan could be the right thing to do,” says Kay Ingram, chartered financial planner.

If some of the pensions to which you are no longer contributing have higher charges, you could transfer into a cheaper plan. You can verify charges by asking the provider of the pension into which you plan to transfer for an annual statement which details them. However, there are a number of issues to watch for.

“Comparing charges can be tricky as a higher flat fee may be cancelled out by a lower ongoing charge,” says Ingram. “A simple way is to divide charges in pounds and pence by the fund value in pounds and pence to get a simple percentage for comparison. To avoid comparing apples with pears, take account of the differences in the funds the pension invests in.

So if you are thinking of transferring you should look carefully at all the different charges levied – by both the schemes you are in and the one into which you are thinking of transferring. Also consider how you will use your pension in future: for example, how often you intend to trade or rebalance, what you are going to invest in, and how different charging structures might work out for you personally. But in most cases, it is unlikely to make sense to transfer into a pension with higher charges.

More modern pension plans might offer a wide range of funds in which to invest. “A plan which offers limited investment options might not provide the potential for growth to match inflation,” says Ingram.

When deciding whether to transfer out of a pension, consider your overall investment strategy, including the level of risk you want to take, the length of time until you are likely to access funds, and whether all your plans offer suitable risk-adjusted investment options to meet your needs. 

Because the pensions you have now will determine the level and sustainability of income you will receive in retirement, it could be worth getting professional advice or guidance, especially if you are near to retirement and or your retirement income will be heavily dependent on investment returns. If you are over age 50, you can get free guidance via Money Helper, an independent industry sponsored guidance body, at moneyhelper.org.uk/en/pensions-and-retirement/pension-wise/book-a-free-pension-wise-appointment

Process

To transfer out of a pension you should have the details and plan number for the pension into which you are going to transfer, and for the ones from which you are transferring. If you do not have these details, contact the pension providers or your employer – or former employers - if the pensions were obtained through them. If this is not possible you may be able to get this information via the Pension Tracing Service at pensiontracingservice.com or by phone at 0800 1223 170.

If you have these details, you may be able to transfer online out of simpler contracts without guarantees and protections. But some providers cannot facilitate this and or may wish you to sign a transfer out form.

If you are still in work and contributing to an employer scheme, and it is a modern plan with reasonable charges, this is likely to be a good place into which to transfer your other pensions. Your employer may offer guidance or advice worth up to £500 per year tax-free which you can pay for via salary exchange, thereby reducing the cost of advice via tax and National Insurance savings.

Ingram says: “If you are still building a pension and are many years away from needing access to the funds, then keeping it simple may provide a lower-cost solution. A simple personal pension invested in tracker funds only could cost as little as 0.15 per cent a year of funds invested. Managed funds typically offered by insurance companies such as Aegon, Aviva, Legal & General and Scottish Widows, [of which the] managers actively select stocks cost a little more, but can be accessed for an average of 0.45 to 0.75 per cent.”

If you wish to invest in a wider range of investments than open-ended funds, you need to transfer into a self-invested personal pension (Sipp). Some of these allow you to invest in assets such as commercial property. But they tend to have higher costs. “Paying for lots of extra investment options you may never use could be poor value,” says Ingram. And as Sipps are self managed “it is important to be realistic about the amount of time available to manage the portfolio – especially if your retirement income will be highly dependent on success in this.”

Gibb adds: “Unless you have a specific requirement which your workplace pension can’t facilitate, for most investors a Sipp is not the right answer.”

But Gibb also says that having a good choice of investments is more important in retirement because you do not have time to make up for poor investment decisions or performance. And you may have specific requirements such as needing to generate a certain level of income each year and or preserving the real value of the fund.

If your former workplace scheme does not meet your requirements you can invest in low-cost Sipps offered by an investment platforms such as AJ Bell and Fidelity. These allow you to invest in funds, and listed securities such as investment trusts, exchange traded funds and UK-listed shares, but not commercial property.

Hargreaves Lansdown, for example, charges 0.45 per cent on funds in Sipps up to the value of £250,000 and 0.25 per cent on funds with a value of between £250,000 and £1m. If you invest in listed securities the annual platform charge is capped at £200.

Interactive investor usually charges a £9.99 service fee and £10 Sipp fee each month, though sometimes runs special offers.

In all these cases, you also have to pay the fees of the funds in which you invest, and in some cases trading fees. For more, see our guide to picking platform Sipps at investorschronicle.co.uk/education/2020/11/27/sipps-the-best-low-cost-platforms/ or our Sipp supplement later this spring.