In 2020, the Association of British Insurers (ABI) reported that there are around 1.6 million “lost” pension pots in the UK. The total value of these misplaced pensions exceeds £19 billion, or nearly £13,000 per pension pot.
Pensions can become lost if you move house, for example, and fail to contact your provider. You might also have changed jobs several times and forgotten where your pensions are held.
One way to keep track more easily is to consider pension consolidation – moving each individual pot into a single larger one. There are pros and cons to this approach. Here are a few of the main ones.
1. Knowing where your pensions are
Pro: Consolidation makes it easier to keep track
Putting all your pensions in one place means that you only have one set of paperwork to keep hold of and one set of contact details to remember.
When requesting valuations, annuity quotations, or when planning for the future, one figure makes calculations much easier to complete and the results more meaningful.
To put all your plans in one place, though, you’ll first need to know where they all are.
If you think you might have lost a pension, you can use the Pension Tracing Service to help you track them down.
Con: Moving them could incur transfer charges
Finding lost pensions is the first stage of the process. Once you find them, you’ll need to consider carefully whether consolidating them with an existing scheme is the right thing for you.
Request a valuation, and look at the current performance and any policy fees you are paying.
Also, find out whether charges apply for transferring out. These might outweigh the benefit of transferring and mean you are better off leaving a smaller pension where it is.
2. You give yourself greater control
Pro: You can move your plans into your preferred scheme
When you have a clear idea of where all of your pensions are, you will be in a better position to compare fund performance and charges across all the schemes and decide on your preferred one.
As well as charges and performance, you might also think about the options the scheme gives you – the number of funds available and the cost to switch, for example.
Does one scheme allow you to track investment performance online, or give you the option to contact the scheme or amend your plan through an app?
Con: You could lose some of the valuable benefits attached to older plans
Older plans might have higher charges, less flexibility, or limited options for controlling your funds online. But they could have other valuable benefits attached.
Some pensions might offer guaranteed annuity rates that pay a higher pension if you take your funds in a certain way, and from a certain age. Others might have a guaranteed minimum pension, enhanced tax-free cash options above the usual 25%, or favourable death benefits.
You’ll need to be clear about the true value of these benefits and whether a transfer out to consolidate your pensions will mean you miss out.
3. You could end up with a larger overall pot
Pro: Consolidation into the scheme with the lowest charges or best returns could lead to a bigger pot
Transferring all of your plans into one scheme will give you one large pot. But the effects of compound growth, and the benefits of choosing the best-performing scheme, could see your pot grow even more.
While this is clearly good news, there are tax implications to consider when you come to take funds.
Cons: Tax implications of taking larger pots in one go
Taking all of your funds in one go could tip you into a higher tax bracket and you might also find that you are emergency taxed if you take some flexible pension options.
Certain lump sum payments, for example, are taxed on a “month 1” basis. This assumes the amount you receive is the first in a series of regular monthly payments and cuts your tax allowance by one-twelfth.
You will be overtaxed, although you can claim this overpayment back.
If you have smaller pensions that are below £10,000, you can take three of these under “small pot” rules. You’ll receive a lump sum, of which 25% is tax-free. The main benefit of taking a pension this way is that it does not count towards your Lifetime Allowance.
Once you transfer a small pot and consolidate it into a bigger plan, small pot rules no longer apply.
Get in touch
If you are concerned you might have “lost” pensions you might consider pension consolidation. It won’t be right for everyone, or for each separate pot you hold, but Hartsfield Planning can help you to make the right choice for you.
Please get in touch and find out how our team of expert planners can help you.
Please note
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.