Learn more about consolidating pensions and the potential benefits and drawbacks
A pension offers a financial safety net during your later years, giving you an income long after you’ve left the world of work. Saving into a pension can help you enjoy a good standard of living and ensure you make the most of your retirement.
But in a career spanning many decades and employers, you could end up with multiple pension pots – which can easily be forgotten about. Combining pension pots into one plan has become more common in recent years. But it’s important to consider all the potential benefits and drawbacks before making any decisions.
Read on to discover how to consolidate pensions, what the process can achieve – and why it might not be right for everyone.
Pension consolidation is the process of combining different retirement pots into a single plan. Consolidating pension pots may sound like financial jargon at first, but the goal is straightforward: to streamline the various personal and workplace pensions you’ve collected over the years, making them easier to manage. After all, it’s much simpler to see how one pension is performing, rather than seven or eight.
Simplicity isn’t the only reason people choose to merge pension pots. Many follow this path to save money on charges too, by reducing the number of schemes they pay management fees on.
Pension consolidation involves shopping around for a provider you can trust, with competitive charges and the right investment options to suit your needs.
Once you’re certain it’s right for your finances, you can ask for your existing pots to be transferred to the same place. Many providers even allow you to combine your retirement pots online, although you may be asked to seek financial advice first.
Just remember that combining pension pots won’t be the best option for every saver, and it’s certainly not something to rush into. It’s mainly designed for defined contribution pensions – where your money is invested and the amount you get out depends on both investment performance and the sum saved.
In fact, there’s a danger you could miss out on valuable benefits by transferring final salary schemes, which are based on your length of service with an employer and wage.
Consolidating pension pots is a serious decision. Your thinking should be guided by the types of schemes you’re a member of, the charges and penalties you’re likely to face, and any benefits you could be forced to give up, such as guaranteed annuity rates.
Potential advantages of combining pension pots include:
The potential disadvantages of pension consolidation include:
If you’ve done your homework, taken advice and still feel consolidation is right for you, just follow these steps to merge pension pots:
If you need some help, pension specialists can work with you to access your pensions and make recommendations on whether combining your pots is best for you. Chat to one of the team from our retirement advice service to ensure you’re making the most of your pension savings.
The time needed to combine all your pensions will depend on the number you’re consolidating, and whether your provider is required to track them on your behalf. Combining pension pots could take just a few weeks if you have all your scheme details to hand. But the process may run into months if you ask the provider to do the pension tracing for you.
Many providers will allow you to transfer and consolidate defined contribution pensions yourself, so long as you know all the scheme details. This can often be done through an online application. However, you’ll normally need the help of a financial adviser to transfer a final salary pension due to the complexity of the process.
You can have as many pension pots as you wish. However, you’ll need to ensure their combined value doesn’t exceed your tax-free lifetime allowance (currently set at £1,073,100). If you go above this level, you’ll need to pay tax on your pensions. Combining pension pots is often used by savers to keep everything in one place.