Zoe Bailey, a director at financial planning specialist Tilney, goes through the pros and cons of consolidating your pensions
Keeping track of multiple pension pots can be challenging – especially in times of economic uncertainty.
As a result, simplifying your retirement funds and transferring them into one place can be an attractive proposition. However, there are a number of things to consider – not least the fact that it can get expensive.
For those thinking of consolidating their pensions, here’s what you need to know.
What are the benefits of consolidating several pensions into one?
With several pensions, people have to manage lots of statements from different providers, which can feel overwhelming. With just one, it is not only easier to keep track of everything, it is also more simple to assess how much you have in total, how your overall pension pot is performing annually and how much is being charged.
Moreover, it is easier to assess whether your contributions are set at the right level to meet your retirement goals, giving you more peace of mind.
If your pension was established before the pension freedoms were introduced in 2015, you may benefit from transferring it to a more modern policy where you will get the flexibility you are looking for.
If you retain an older pension, when the time comes for you to access it you may not be able to do so in the way you need or wish, and you may have to transfer it anyway to a newer policy in order to receive the flexible benefits you are looking for, both for you in retirement and your beneficiaries of any remaining fund.
And with a new flexible income drawdown option in modern pensions, you can choose how you draw the benefits you require. Even once you have begun to receive the pension benefits, your pension stays invested helping it to grow and provide you with your desired ongoing retirement income.
If your pensions are all in one place, it is far easier to continue to ensure that your investment strategy, and therefore the risk profile, is still suitable for you over time.
Older pensions (pre 2015) are likely to be invested in default portfolios that could be too high risk for you now. These pensions could have fallen in value by more than you are comfortable with, especially during the recent market volatility this year.
Are there any reasons not to consolidate?
Consolidating your pensions is not something that should be taken lightly.
For some people it will absolutely be the right thing to do, giving savers huge peace of mind and enabling some to see that they can retire earlier. For others, some caution will be needed.
For example, if you’re thinking of consolidating, you need to be aware that guarantees could be lost.
For a start, it makes a big difference if your pensions are defined benefit (DB) or defined contribution (DC) schemes. If you’re part of a DB scheme, transferring it into a DC scheme may mean that you will forego some, or all, of the guaranteed benefits that you then cannot recover.
For most DB members, therefore, a transfer is not suitable, and while it may be something to explore for some, it is generally advised to stay in the scheme.
It is also worth remembering that different pension providers offer different investment strategies. Some might have 10 options, while others might have many more to choose from. Where there are more options it is always more likely for you to find the right one that fits all your objectives. It is about understanding what the right investment option is for you personally, and then consolidating your pension savings into the right plan.
To help with this, it is best to seek professional financial advice to understand all your options before making any significant decisions about altering your pension.
How much does it cost to consolidate?
Transferring your pensions does not come free.
The cost of transferring will vary between providers, and you will need to work out if the exit cost is balanced out by the benefits of the more modern pension policy or a potentially cheaper ongoing charge for the new pension. You may be able to consolidate all your pensions into one policy and pay less in charges overall.
However, it is also important to note that a cheaper pension is not always the right option.
In some cases, while the new plan may cost more than the old one, it may mean your pension is now more likely to achieve what you want and need it to do.
It is important to weigh up all the pros and cons, and seek out a professional who can support you before you make any big decisions.
Together you will find the best option for you and your family in the long term.
Zoe Bailey is a director at financial planning specialist Tilney