How do I consolidate my pension pots?

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.

What is pension consolidation? 

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.

How pension consolidation works

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.

Should I consolidate my pension pots?

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.

Benefits of pension consolidation

Potential advantages of combining pension pots include:

• A one-stop shop to monitor your savings. It’s easier to keep an eye on your contributions and get an accurate pension forecast when all your cash is in the same place.
• Cutting the charges you pay. Consolidating your pension pots can help you avoid management fees on multiple schemes. Your older plans might carry higher charges than the latest products too.
• Greater investment choice. Moving to a newer scheme or self-invested personal pension (SIPP) could give you more options when investing your pension savings.
• Ensuring you stay within pension allowances. With multiple schemes to remember, it can be difficult to check that you’re keeping to the annual allowance and lifetime allowance

Drawbacks of pension consolidation

The potential disadvantages of pension consolidation include:

• Losing out on final salary pension benefits. Also known as defined benefit schemes, final salary pensions offer valuable benefits which shouldn’t be given up lightly.
• Paying large exit charges. Your existing pension providers may charge you a fee for leaving. It’s vital to do the maths to ensure combining pension pots makes financial sense.
• Giving up perks like guaranteed annuity rates. You may find some of your older pension schemes offer guaranteed annuity rates. Annuities are a way of turning your pension pot into a regular retirement income. A guaranteed rate can give you a much higher income than you’d normally get.

How to consolidate pensions 

If you’ve done your homework, taken advice and still feel consolidation is right for you, just follow these steps to merge pension pots:

• Hunt down all your pension schemes. Collect any provider information and reference numbers from previous pensions by carefully going through your online and paper records.
• Get in touch with previous employers. If you’re unsure about your pension arrangements with a particular company, contact the HR or payroll team to get confirmation.
• Use the Pension Tracing Service. This government-backed organisation can help you unearth lost pensions, including both workplace and personal schemes.
• Tell your provider to consolidate your pots. Whether you’ve chosen a new company, or plan to stay with one of your existing pension providers, you’ll need to instruct them to start the consolidation process. Give them as many details as you can about the pots you wish to consolidate. They’ll then get to work contacting each provider in order to move your old pensions across. Depending on how many pots you’re consolidating, this can be a lengthy process and may take a few months. 

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.

FAQs

How long does it take to combine pensions?

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.

Can I transfer my pensions myself?

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.

How many pension pots can I have?

You can have as many pension pots as you wish. Combining pension pots is often used by savers to keep everything in one place.  However, you'll need to ensure the total value of all your pensions doesn't exceed your lifetime allowance (the standard lifetime allowance is currently set at £1,073,100). As a result of the Chancellor's announcement in the Spring Budget 2023, if you go above this level you'll no longer be charged a lifetime allowance excess charge from 6 April 2023.

However, you'll still need to pay tax on the value of your pensions at your marginal rate of tax if it exceeds your lifetime allowance and you take the benefits as a lump sum.  If you place the excess in drawdown or use it to buy an annuity the income from these, when taken, will be taxable at your marginal rate of tax. The Government currently plans to remove the lifetime allowance completely from 6 April 2024, but details of the new pension tax rules and limits that will replace it have not yet been finalised.  

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