Navigating the world of pensions can be relatively complex, especially as over the duration of our working lives we can end up with numerous different pensions from various employers. In this guide we look specifically at the advantages and disadvantages of consolidating a defined contribution pension, and what you need to consider.
- What is a defined contribution pension?
- What is pension consolidation?
- What are the benefits of pension consolidation?
- What are the disadvantages of consolidating pensions?
- How to consolidate pensions
- How do I find details of all the pensions I have?
- How to get the most from your pension
A defined contribution pension is a type of pension scheme that is also known as a ‘money purchase’ plan.
Unless you’ve chosen to opt out of your workplace pension, a defined contribution plan is the type of scheme your employer is most likely to have. The exception is the public sector where some jobs still come with a ‘defined benefit’ pension, although many large employers offered these in the past. However, in this article we’ll only be looking at defined contribution plans.
If you’ve got more than one pension, consolidation simply means bringing some, or all, of them together and putting them in one pension pot. You can either move your pensions into an existing scheme or you can transfer them to an entirely new one.
In some cases, you can consolidate your pensions even if you have already started taking money from them.
Is it a good idea to consolidate pensions?
Whether consolidation is a good idea largely depends on the terms of new pension vs the old, your own financial goals, and retirement plans. With this in mind, it’s important to speak to an independent financial advisor (IFA) before you make any decisions.
An IFA will be able to assess your current financial situation and pension schemes, along with your long-term aims and offer you advice and recommendations based on your objectives. More importantly, an IFA has the expertise to spot any particular benefits your current pension might have, as well as identify any penalties that may be triggered if you transfer it.
Having your pension in one place makes administration much easier. It also means you’ll be able to quickly monitor and assess how your pension is performing, instead of having to check on multiple schemes. This is helpful when making sure that you’re on track for your retirement goals.
Pension providers charge fees for managing your scheme, if you have multiple pensions then you may be paying higher charges than necessary. Combining all your pensions into one scheme could result in reduced fees which over your working life, could add thousands to your pension pot.
With many older pensions you have to use at least 75% of your pot to purchase an annuity (a guaranteed income for life). However, in recent times annuity rates have become much less attractive – consolidating your older pensions will give you more flexibility to take a lump-sum and flexi access (also known as drawdown) if those options are better for you.
With a newer pension you’re normally entitled to take 25% of your total pension pot, tax-free, from age 55 (soon to increase to 57). If you take the tax-free cash, you can leave the remaining 75% within the pension and take that element as income later on. You can draw whatever income you want from the undrawn element so you can use that flexibility to keep income tax to a minimum.
Death benefit options
Most, but not all, older defined contribution pensions offer the full fund value on death. This is almost always free of Inheritance Tax. Modern plans often have more options, including one that allows the funds to remain within the pension regime for the chosen beneficiaries. This can be advantageous compared to withdrawing the death benefits.
Pension contributions can be invested in a wide range of assets. While traditional assets include stocks and shares, there are also opportunities to invest in particular sectors – for example, those with strong environmental, social, and corporate governance (ESG) principles. Many older plans do not have the range of options that many newer ones do.
Exit fees and charges
Some pension schemes will have exit or transfer fees so it’s important to check what these are before moving your money. Also bear in mind any set up fees you’ll need to pay your new pension provider or IFA, as well as ongoing management costs.
In 2015, pension rules changed which made it easier to access funds in a variety of ways. But while those changes meant greater flexibility, it also provided scammers with fresh opportunities from unsuspecting pension holders. In fact, the Pension Scams Industry Group estimates that £10 billion has been lost to scams since 2015, affecting around 40,000 people.
To protect yourself, never take unsolicited pensions advice from someone claiming to be an expert. It’s now illegal for anyone to cold call you about pensions.
Read more: Could you spot a pension scam?
Missing out on guaranteed payments and benefits
Some older style pensions from the 90s and before may come with benefits that newer schemes don’t have. These can include guaranteed annuity rates or guaranteed minimum pensions which typically are preferential to the terms you would get from a newer pension.
If you’ve been working for a while and have an old pension, it’s well worth checking what the terms are before you take the decision to consolidate.
Some pension schemes may have other benefits, such as additional death benefits or a higher tax-free lump-sum allowance, so you would lose these if you consolidated your pension into a different scheme.
Please note, if you have a pension pot of more than £30,000 which has ‘safeguarded benefits’ (defined benefits, guaranteed minimum pensions, or guaranteed annuity rates) then you are legally required to seek regulated financial advice before making any decisions to move your pensions.
Money Purchase Annual Allowance (MPAA)
If you have a number of smaller pension pots (under £10,000) it might be better to keep them separate if you want to take a lump-sum whilst also making contributions. This is due to the Money Purchase Annual Allowance (MPAA).
The MPAA states that if you take more than your tax-free cash entitlement from your pension pot, other than as a standard annuity, you will only receive tax-relief on future contributions of up to £4,000 per year, rather than the normal £40,000 yearly allowance. However, if you have smaller pension pots then you may be able to take these as a lump-sum without triggering the MPAA.
The easiest way to consolidate your pensions is to instruct an IFA to act on your behalf. They will assess the best strategy for you and undertake the admin work required based on the decision you come to.
Remember that once the transfer has gone through and your pensions have been consolidated, you’ll lose any perks and benefits from your old pension scheme, so it’s absolutely crucial to seek expert and professional advice before you make any decisions.
If you’ve had several jobs, there’s a good chance you won’t remember all the pensions schemes you’ve joined. The good news is that there are a couple of ways to track down old pensions:
- Use the free online pension finder service from UK (you’ll need to know the name of your employer or the pension provider).
- Call the Pension Tracing Service on 0800 731 0192.
No matter how old you are now, you’ll want to make sure you get the most out of your pension when you retire. If you’re still at the start of your working life, this could mean increasing what you put into a workplace pension or setting up your own private pension as well. Pension contributions qualify for valuable tax reliefs which are rarely available for other savings or investments.
Alternatively, you can choose to delay when you retire which would give you a chance to accrue more into your pension pot. You can also delay claiming your State Pension, if you do, the amount you can claim will increase by 5.8% each year under the current rules.
Don’t forget that if you are partly relying on your State Pension, you’ll need at least 35 qualifying years of National Insurance contributions to earn the full amount. If you’re missing any years, you can make voluntary contributions to top this up.
Pension consolidation can also help you make the most of any existing pension funds you have but remember that it’s not just a question of transferring them all into one pot. As we’ve explored, there are all sorts of factors to consider, especially if you have an older style pension plan with guarantees.
To make sure you make informed decisions, it’s strongly recommended that you seek professional advice. At Alan Boswell Group, our IFAs can provide expert advice as part of our retirement planning service. To find out more, speak to a member of the team in 01603 967967.
The value of investments and any income from them can go down as well as up and you might not get back the original amount invested. The past is not a guide to the future.
The value of tax benefits depends on your individual circumstances. Tax laws can change.
None of the information in this article represents a recommendation about whether or not to consolidate your pensions.