If you’ve had more than one job, you may have multiple workplace pensions and find it difficult to keep track. You can choose to consolidate your pensions.
There are two main types of pension – Defined Contribution (DC) and Defined Benefit (DB). Defined Contribution pensions (also known as Money purchase schemes) are based on the contributions you and your employer make, but DB pensions are based on several factors (including your salary, length of service and how far away you are from retirement) and are difficult to replace the benefits they offer. Transferring a Defined Benefit transfer has different considerations. This blog focuses on Defined Contribution pensions, and the reasons for and against transferring your pension.
With pension consolidation you may be able to find a better deal elsewhere, as well as helping you simplify how you manage your pensions by putting the funds in one ‘pot’.
What is pension consolidation?
Pension consolidation is the process of combining your pension pots. It’s likely that you have more than one defined contribution pension if you’ve had more than one job. It’s quite common to forget about pension pots if you only worked for a year or so at one company before moving on.
Unless you weren’t eligible for a workplace pension or opted out, you and your employers will probably have made contributions to your workplace pension. Unless you made changes, you will have been invested in the default option for that pension fund. With pension consolidation you may be able to find a better deal elsewhere, as well as helping you simplify how you manage your pensions by putting the funds in one ‘pot’.
Points to consider before transferring a pension
Bringing your pension pots together could mean you’re better off. There are pros and cons to pension consolidation, which is why many people ask a financial adviser to help them consider all their options and find the most suitable route for them. Here are a few of the reasons why you consider consolidating their pensions:
With each pension scheme you’ll receive annual statements. Transferring your pensions into one place will mean only having one set of paperwork, which can make it easier to see how your money is performing, easier to calculate what your pension will be worth, and easier to manage when you’re ready to retire.
Your pension is an investment and will therefore have an element of risk. You may find that your pension is invested in riskier funds than you are comfortable with. It’s important to understand the need for risk in pensions, as there will be potential for loss, but this can also allow your pension to grow. A financial adviser can help you find your comfort level and explain how risk can be a positive aspect of retirement planning.
Your pension provider will apply an Annual Management Charge (‘AMC’, this is often a percentage of the funds they manage on your behalf) for looking after your pension. Different pension schemes will have different charges. Different schemes will have different AMCs, for more complex needs. You may be able to reduce this cost by moving your pensions into a scheme with lower AMCs.
Transferring your pension may mean giving up certain benefits, so its important to think carefully about how transferring out of a pension scheme will affect you. Older schemes may have different guarantees or benefits which could be valuable to you, like life cover. However, bringing your funds together may give you more options with your pension, leading to potentially greater returns when you’re ready to take your pension.
Like many financial decisions, whether or not you should transfer a pension will depend on your personal circumstances. If you’re considering consolidating your pension, it’s worth remembering that you don’t need to transfer all your pensions in one place. You may want to combine one or two, but keep others separate as they provide you with some benefit – such as a different level of risk, better performance or more flexibility on how you can draw on these funds in retirement.
An independent financial adviser can help you make these decisions based on your circumstances and your long-term goals so you don’t have to make life-altering decisions alone.
Are there any fees involved with a pension transfer?
If you have a Defined Contribution pension, you’ll pay charges each year covering the cost of administering the scheme. If you want to transfer your pension away before you’re ready to retire, you may incur early exit fees. These will depend on the scheme, which is why its important to read all paperwork provided when taking out a pension and asking questions if you don’t understand any of the fine print.
Some people may consult a financial adviser to help them make sense of their pensions. Whether you’re looking to find a lost pension, take out a new pension which will give you greater control, or would like a pension review, an independent financial adviser could help.
The value of an investment and income from it can go down as well as up.