We average between nine and 12 jobs during our working life in the UK, a figure that is expected to rise due to higher mobility among the young. As a result, it is common to build up several pension pots.
Whilst this is perfectly normal, too many small pensions can create problems down the line – from lost paperwork, to missed growth opportunities. That’s where consolidation may help.
What is pension consolidation?
Put simply, consolidating your pensions means bringing multiple pots together in one place. You don’t have to cash them in – you’re just combining your retirement savings.
Why? Because if you have small pots with several providers, they may be using different investment strategies, charging structures and communication tools. Bringing them together in one single pension arrangement may make your money easier to manage.
Millions of pension pots, worth billions of pounds collectively, are estimated to be ‘lost’ in the UK. It’s easier to do than you might think. Changing jobs, moving house and mislaying paperwork are all cited as some of the most common reasons people lose track. It can mean statements are sent to old addresses, or you don’t find out your provider has merged or rebranded.
Over time, these small pots are forgotten and for some people, they slip off the radar completely. That is until retirement comes along and it becomes incredibly difficult (sometimes impossible) to track them down.
Why consolidate?
Consolidation isn’t right for everyone, which is why it is crucial to discuss the issue with an independent financial planner. However, there are several advantages.
As we’ve touched on already, one pension pot can be far easier to manage than several smaller ones. You’re dealing with one provider, receiving one statement and benefiting from one investment strategy. This makes tracking and reviewing your progress much simpler, keeping it aligned with your long-term plans. It also makes it easier to maintain the correct beneficiary/dependent details, if your circumstances change.
When pensions are scattered around, it’s much harder to take an objective look at your retirement prospects. To maximise the potential in your pension, you need to know how much you’ve saved in total, whether your investments still suit your goals and if you’re on track to meet them. Consolidation can give you that clear, joined-up view of your retirement position.
Older pensions, particularly workplace schemes from many years ago, may have higher charges than more modern equivalents, or limited investment choice. Lower charges aren’t guaranteed, but by consolidating such a scheme, you can potentially reduce the fees you are paying and better align the investment with your risk profile, improving the overall value for money.
Different pension pots will inevitably have varying investment approaches and these are usually determined by default when you join a workplace scheme. Another advantage to consolidation is that is allows your pension savings to follow one consistent strategy and match your retirement timescales.
But perhaps the biggest benefit consolidation brings is peace of mind. It means fewer pensions to keep an eye on, reducing the risk of them being lost or overlooked, and makes planning much easier when retirement approaches.
Inheritance planning
No one wants to think about their demise, but if you die with multiple pensions, your executor must contact each provider separately, a process that can take time. A single, up-to-date pension with correct beneficiary details maybe far simpler and quicker to administer.
Lost or forgotten pensions are much harder to find after death, as the person who would be able to track them down (you!) is no longer here. This is another reason why consolidating now can make matters a lot simpler, as you have a clear record of your policies.
Additionally, from April 2027, unspent pension funds will form part of your taxable estate for inheritance tax purposes, making the need to trace all of your pensions more pressing. Delays caused by chasing multiple policies after death could create real problems for your loved ones.
Consolidation isn’t always the right strategy
As I mentioned earlier, consolidation doesn’t suit everyone. Certain pensions include valuable features that may be lost if transferred. For example, guaranteed annuity rates, protected tax-free cash, defined benefit (final salary) pensions and special retirement ages or benefits.
Choosing to consolidate without thorough checks could mean forfeiting these perks, so always seek independent advice before taking the plunge.
Even if it transpires consolidation isn’t right for you, it’s important to reduce the risk of pension pots becoming lost by keeping provider contact details up to date, retaining your pension statements and reviewing your schemes regularly – not just before retirement. The easiest way to do this is to set up a simple spreadsheet or pension list that you update annually, or when life changes require.
The process
Discussions about consolidation always start with a little history lesson. We’ll ask you to walk us through your career so far, including names of employers and dates, so we can identify all your existing pensions and check for any lost or forgotten pots.
Next, we will review each pension carefully, regardless of how much it’s worth, to establish what you are paying in fees, what investment options it offers, and the guarantees or benefits applicable. We can then assess its suitability, against your retirement goals, attitude to risk and overall financial position.
Only when this process has been carried out in full, with all necessary due diligence, will we recommend consolidation (or not), if it is in your best interests.
Pension decisions taken now have a lasting impact on your future, so it’s important the choices you make are right for you. Consolidation can be a powerful way to simplify retirement and avoid lost pension pots, but it isn’t a one-size-fits-all solution. Taking the time to review your retirement plans properly, particularly with professional help, will keep you on track.
If you would like to find out if pension consolidation would benefit you, don’t hesitate to book a free initial consultation with one of our expert team. Contact us on (01246) 298181 or email: enquiries@belmayne-ifa.com
