When you’re approaching retirement, pension consolidation is an important consideration.
Pension consolidation is the process of deciding whether to move all your pension pots into one scheme or to keep them separate with different providers or administrators.
According to a survey by pension and life insurance provider Scottish Widows, nearly three-quarters (72%) of respondents want small pensions to auto-consolidate. You’re especially likely to have multiple small pots if you’ve had lots of jobs, with each employer providing you with a different scheme.
Worryingly, this same research also found that more than 3.6 million Brits have no idea how many pensions they have. This puts them at risk of paying more than necessary in fees.
As of September 2021, consolidation doesn’t currently happen automatically. That means you need to decide for yourself whether it’s the right thing for you to do.
So, should you consider consolidating your pensions? Here are the various pros of each strategy.
Pros of pension consolidation
There are various benefits to consolidating your pensions.
Easier to administer
The first benefit of consolidation is that a single pot is far easier to administer, compared to handling paperwork and logins for numerous schemes.
This becomes even more important when you come to draw income from your pension pot, as it will be a simpler process if you’re dealing with just one provider.
Potentially lower cost
To manage and invest your pension, pension providers usually charge you a percentage-based fee on your pot. As a result, the more schemes you have, the more providers you need to pay fees to.
You may be able to reduce your overall costs by putting all your funds under one scheme.
Aligned investment strategies
Different pension providers will manage your money in different ways. This may mean that your pension investment strategies won’t necessarily complement one another.
This could mean that you’re exposed to more risk than you’re comfortable with.
By putting all your money under one scheme, you can be more confident that your money is aligned with your goals and tolerance for risk.
Pros of keeping separate pots
On the other side of the coin, there are still advantages to keeping separate pension pots.
Defined benefit schemes
If you have a defined benefit (DB) or “final salary” pension scheme, then it might not be worth moving it into a defined contribution (DC) scheme.
DB schemes tend to present less risk. This is because they provide a set, consistent amount in retirement. But, moving a DB pension into a DC scheme would mean investing it, which would open it up to greater risk of losing value.
If you have a DB pension, in the vast majority of cases, the advice will be to leave well alone, as a secure income will form the foundation stone of your overall retirement planning. However, there are always exceptions which need specialist financial advice.
While a benefit of consolidating is to align your investment strategies, keeping them separate can offer you greater diversification.
A dip in the value of the investments under one scheme could see your entire pot lose value.
But, if you have multiple pots, they’ll likely contain a variety of investments in different industries, sectors, and geographical locations.
This could help to insulate you from market movements, ensuring some of your pots continue to grow in value, even if others suffer due to difficult economic circumstances.
Advantages of certain schemes
Some pension schemes come with specific advantages that you may lose if you transfer your holdings out.
For example, you may receive a guaranteed annuity rate from your pension provider. This rate may be higher than what you’d be able to find if you looked to buy an annuity on your own.
It may be worth keeping some of your retirement funds in a certain scheme just so you can keep access to benefits like this.
Tracking down your pots
If you’re one of the 3.6 million people who has lost track of their pensions, there are plenty of options for finding your retirement funds.
Your first option is to do this manually. Check back through your records and see if you can find details of the different schemes your employers enrolled you in throughout your working life.
If you can’t find any paperwork for your pots or you simply can’t remember which schemes you were in, your next option is to use the “find pension contact details” service on the government website.
This service is free and can tell you which scheme your employer uses or used. However, it cannot tell you whether you had a pension with your employer or how much you have in your pot.
Alternatively, you could work with a financial adviser or planner who will be able to use your details to find your old pots and schemes.
Finding the right strategy for you
All in all, choosing whether to consolidate your pots comes down to you and your financial goals.
You’ll need to weigh up which strategy you think will provide the best returns for you, depending on how you want to be able to draw income in retirement.
If you’d like help figuring out which one would work best for you, you could consider working with a financial adviser.
At Bowmore Financial Planning, we have years of experience in helping clients make the right choices for their money. We can take a look at your entire financial situation and provide you with advice that suits your specific circumstances.
Get in touch
If you’d like to find out how we could help you decide whether to consolidate your pensions, please get in touch.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
Workplace pensions are regulated by The Pension Regulator.
Bowmore Financial Planning Ltd is authorised and regulated by the FCA