You’ll have a lot of decisions to make when you retire, but the run-up to retirement is filled with important choices too.
One thing you’ll need to think about is whether to consolidate all your different pension plans into one single pot.
You might have multiple occupational schemes from different jobs or various private pensions held with different schemes. There are pros and cons to bringing them all together in one place.
Whether pension consolidation is right for you will depend on many different factors, including the types of plans you hold, how close you are to retirement, and the size of your respective pots.
Here are some things to think about when considering whether or not to consolidate your pensions.
The benefits of pension consolidation
- It could give you a larger pension pot
Your different pensions will probably be held with different providers and that could mean different charging structures and differing investment performance too.
If an older pension plan has higher charges and fewer investment options, transferring all your existing pots into a newer scheme with lower fees and better fund performance could increase the size of your benefits.
Even a small decrease in charges could increase your eventual pension pot by a significant amount over the years of a long-term investment.
- It could give you increased control
As well as potentially smaller charges, modern pensions might also offer an increased fund choice and the ability to choose your investments.
Using an online portal, you might track the performance of your funds or opt to switch investments. These options give you much more control over your fund and real-time access to how your pension pot is performing.
Be sure to find out if there’s a cost to switching and speak to us if you’re unsure about the current performance of your fund or any switching decision.
- It’s easier to keep track
Good financial planning means keeping track of your potential income at retirement.
With all your eggs in one basket, you only have one value to keep track of and no ‘lost’ amounts to chase.
Rather than requesting and receiving multiple sets of statements each year, you will receive a single statement showing your full pension fund. This could certainly save you time and might make budgeting easier too.
If you think you might have a ‘lost’ pension, try the Pension Tracing Service. It can help you locate pension schemes you’ve lost track of and provide you with contact details for them.
The disadvantages of pension consolidation
- There might be transfer charges to pay
Transferring your pension to a new provider will probably not be free. If you find that you have multiple pensions, that will likely mean multiple transfer charges to pay.
The charges may not be prohibitively large but be sure to weigh any charge costs against the perceived benefits of consolidating.
- You might lose additional benefits
You might find that some of your pension pots have additional benefits that only come into force if you take your pension at a certain time, or in a certain way.
Your pension might have guaranteed annuity rates, for example. Your annuity at retirement will be calculated based on pre-determined – and often favourable – guaranteed rates. If you transfer your plan away or don’t take an annuity at retirement this benefit will be lost.
Some Final Salary schemes have a Guaranteed Minimum Pension attached. This is an annual amount promised at the outset and is often worth more than you’d receive if you transferred your pot into a Defined Contribution and made use of Pension Freedoms.
- You could pay more tax
The biggest disadvantage to pension consolidation is that when you come to take benefits, the larger amounts involved could push you into a higher tax bracket.
If you opt to make use of Pensions Freedoms and access your pension via an Uncrystallised Fund Pension Lump Sum, HMRC will tax your payment on a ‘month 1’ basis.
This assumes that the lump sum amount you take is the first in a series of equal, regular monthly payments to be made throughout the year. You only receive 1/12th of your true tax allowance and are taxed heavily as a consequence.
You can claim the overpaid tax back from HMRC, but this can be time-consuming.
If you intend to put your pension lump sum toward a specific ‘big-ticket’ item – a large holiday or home improvements, for example – you’ll need to consider the impact of receiving less than you thought, or of having to wait to receive the full amount.
Is consolidation right for you?
There are many factors to consider when deciding whether to consolidate your pensions. The number of pots you have, where and how they are invested, and what you plan to do in retirement will all have an impact.
Having a detailed financial plan in place will help you consider the budgeting implications of moving your pensions and we can help you put a long-term plan in place, based around your personal circumstances and retirement goals.
Please contact us to discuss your financial situation and whether financial protection would be appropriate for you.