Pension consolidation



We all change jobs throughout our working lives, and as a result of this may accumulate several pensions along the way. Having several pension pots can be difficult to monitor and easy to forget, so what is the best thing to do with them? The Department of Work and Pensions (DWP) estimates that the average person will have 11 employers over their working lives, which could mean 11 different pensions.

 

Many people choose to consolidate their pensions, and while it may make it easier to keep track of what’s happening with your money it might not be right for everyone. We thought we’d look at the pros and cons of pension consolidation.

When consolidating pensions, look only at those where contributions have already stopped or individual pensions that your employer is not paying into on your behalf.

 

Pros

Easier to monitor

Some pensions have better investment options than others so consolidating would allow you to ditch the under-performing ones and take advantage of those that are performing better. Having everything in one place makes it easier to review investments and make changes. Since investment performance is the biggest factor in the amount of pension you will receive this is usually the main reason to consolidate.

 

Lower charges

When you have several pensions to consider it can be difficult to know what the ongoing charges are. Quite often, having several pensions means there are charges being paid several times depending on the number of pensions you have. As charges are deducted from pension plans consolidation means you will pay less in charges which means you’ll have more in your pension pot.

 

Stop trail commission

If you opened a pension before January 2013 and your financial adviser was paid by commission, they would sometimes receive a lump sum payment upfront followed by a yearly trail commission of up to 1% of your pension fund each year. This would come out of your pension fund meaning the value of your final pension pot would be reduced. Consolidating your pensions and switching providers should cut the trail commission link.

Financial advisers are no longer allowed to be paid by commission for new investments.

 

Cons

Exit fees

If transferred away penalties can be added to some pensions.

 

Time

It may take time to contact all your pension providers and arrange a transfer. If providers are not signed up to the paperless transfer service, it could take weeks or months.

 

Lose money

Consolidating a with-profits policy, where a large part of the fund’s final value is in the terminal bonus at maturity, could mean you are worse off.

 

It can be difficult to work out if pension consolidation would be right for you which is why we would advise taking professional financial advice before making any decisions.

 

The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.