FINANCE
SHOULD I COMBINE MY PENSIONS INTO ONE POT? If you’ve worked for several employers throughout your career, you might have accumulated multiple pension plans. You may also have set up personal pensions, especially if you’ve been self-employed or a contractor at some point. Owning multiple pensions can be an administrative burden, but it could also be costing you financially – whether that’s through excessive fees or poor investment performance. Consolidating your pensions into one pot could help you keep track of your finances more easily, reduce charges, and boost how much money you have at retirement. But while there are advantages to pension consolidation, there are potential drawbacks and it’s important to seek advice on whether it’s right for you. To help you get started, here are some of the pros and cons to consider.
PENSION CONSOLIDATION: THE PROS Keeping on top of several pensions can be time-consuming. If you have, say, five pensions, then that’s five lots of investment performance to monitor, five different charges to keep an eye on, and five statements to read through and understand each year. Few people have the time, inclination or even the know-how to do this accurately. For some people, therefore, transferring pensions to one provider may simply be about making their ‘life admin’ more straightforward. You’ll also be paying the administration fees for each of your pensions, which may not be cost-effective. This is especially the case for those providers
operating outdated and uncompetitive charging structures. Fees eat into your investment returns and may ultimately reduce how much money you have at retirement. By combining your pensions, you might be able to save on charges. Fees aren’t everything, however, as you also need to consider the performance of each pension fund. It may be that some of your pensions have poor investment performance, and that moving to a different scheme offers better investment growth potential. Comparing charges and investment performance isn’t easy to do on your own – if you’re at all unsure, speak to an adviser.
PENSION CONSOLIDATION: THE CONS Consolidating your pensions could prove financially detrimental if it means giving up valuable benefits and guarantees. Ones to watch out for include: n Enhanced pension commencement lump sum: this lets you withdraw more than the standard 25% tax-free lump sum when you start accessing your pension n Protected pension age: this enables you to access your pension savings earlier than age 55 (or 57 from April 2028) n G uaranteed annuity rate: this lets you buy an annuity at a set percentage of your accumulated fund, which may be far higher than annuity rates today n Built in life insurance or critical illness cover. These benefits and guarantees aren’t always easy to spot, so it’s worth having your pension plans thoroughly assessed by an adviser. Otherwise, there’s a risk you’ll throw away a valuable perk and end up with less money in retirement. An adviser will also check whether any of your pensions charge large exit fees and, if so, advise whether it makes sense to stay put.
28
