More than one pension? Should you consolidate them into one pot? Here are the advantages and pitfalls.
Many of us end up with several different pension plans over the course of a working life. Some might be “defined benefit” where we are promised a certain level of pension from a certain age, while others – increasingly these days – are “defined contribution”, where the only thing which is certain is what we or our employer have put in.
So is it worth consolidating them? It’s a natural question to ask when we receive lots of different annual statements which show some pensions performing better than others. And if you have to write lots of change of address letters when you move you might be prompted to wonder if you really need all those pension plans.
So here are some reasons for and against …
The case for consolidating your pension
1. Investment performance
Some pensions have better investment options than others – consolidating could take advantage of those and say goodbye to the under-performing pensions. This is probably the biggest reason to consolidate since investment performance is likely to be the biggest factor in how big a pension income you eventually receive.
Poor investment performance can happen for a variety of reasons. In older pension plans, you may be limited to a particular “managed” pension fund run by the pension provider, which they have not managed very well or very actively. In other pensions there may be a better choice of funds, but it may still be limited – some “stakeholder” pension plans fall into this category.
Or it may simply be down to your original choice of investment funds which needs reviewing and updating for today’s investment environment.
Charges levied by pension plans are also important. Consolidating could mean getting rid of the higher charging plans (typically the older ones) – although it is not always easy to find all the information on what the costs of a particular pension plan really are.
3. Making life easier
Your administration is easier if you don’t have to deal with so many pension plan providers – for example, changes of address and dealing with the annual paperwork. Also it may be easier to turn your pension into an income at retirement if you have fewer plans to deal with.
The case against consolidating your pension
1. The benefit of defined benefit
If you have any defined benefit (“final salary”) pensions, then it is rarely worth moving those into a defined contribution (or “money purchase”) plan. That’s because you would be taking on the investment risk instead of the pension scheme. And there may be additional benefits such as entitlement to a bigger lump sum which you would lose. Having said that, if you are concerned about the security of your pension in that employer’s pension scheme you may feel happier to move it elsewhere and have it under your control.
2. Added advantages
Some types of defined contribution plan have additional benefits which you would lose if you move that pension money elsewhere. That could include a guaranteed annuity rate (which is the rate at which your pension money is turned into an income) – this will almost certainly be higher than you would get on the open market. It could also include a higher than normal tax free lump sum entitlement (25% is the normal maximum).
3. Investment detriment
If your pension is invested in a With Profits fund, then there may be a Market Value Reduction applied. Although that isn’t necessarily a show-stopper (the reduction might be quite small) it certainly needs considering.
4. The Cost of consolidating
For most people, asking a financial adviser to look at their pensions is the best option. That way you can be sure that all the important factors are taken into account. But you do have to consider the advice fee that would be payable.
And finally, some of the work in consolidating will be up to you – digging out policy numbers and addresses, for example.
But if the end result is an up to date pension plan with the flexibility you require, and which – maybe for the first time – you really feel on top of and confident in, then it may well be worth the effort.
About the author
Peter Lawrence is an independent financial adviser and Principal of Prime Time Financial. Peter’s passion is to help people get the most out of life by making full use of what they have, and that certainly includes their finances.