Should I consolidate my pensions and how do I go about it?

The more transient nature of work today means people are accumulating multiple pension pots. Consolidating them into one can remove complexity and help achieve better returns.

Life was simpler back then, or so the saying goes from one generation to another. The reality is some things are much simpler today, thanks largely to advances in science and technology. When it comes to pensions, however, there's a lot of truth in the old sentiment.

That’s because the long-heralded ‘job for life’, in which people strived to spend an entire career loyal to one employer, is mostly now a thing of the past. It is far more typical today for workers to change jobs every few years, with research by Open Study College finding the average millennial has already worked in as many jobs as people aged decades older.

Hopping from job to job can mean you end up accumulating multiple pension pots, a trend which has risen in prevalence since auto-enrolment in workplace pensions was first introduced in 2012. A study by Interactive Investor found two-thirds of UK workers have more than one pension, which makes pensions more complex and burdensome to manage.

“Historically when you retired you only had one pension pot which made things very simple, but employment trends have changed,” says David Browne, Independent Financial Adviser at Ascot Lloyd. “I was introduced to someone recently with nine pensions. That’s nine lots of paperwork coming through each year. If you don't keep them all updated, like after moving house, it can be even harder to locate older plans. It can all become quite overwhelming.” One place to start looking for lost pensions is on the government website -  Find pension contact details – GOV.UK.

Diverging from the default

Keeping multiple pensions not only brings additional administrative tasks to your life, but it can also potentially impact your long-term returns. The complexity of managing them all, and a lack of education in general, means many people simply keep them in the default funds of their employer’s pension provider. These are not necessarily the best performing in the market, nor are they aligned with your own risk appetite and long-term retirement goals.

The vast majority of people (94%) in a master trust pension scheme, the main type of employee pension scheme, have not moved from the scheme’s default strategy, according to the Pensions Policy Institute. Last year master trusts allocated, on average, 68% of assets to equities 20 years before a member's retirement date, 52% 10 years before retirement and 19% at retirement, with exposure to cash, gilts and bonds rising from 18% to 36% to 76% over the same time period. This blanket approach to derisking investments as retirement nears, however, might not suit your personal retirement plan and appetite for risk.

“A lot of the pension providers will put you in a bog standard fund based on your age. That's often just not fit for purpose in terms of meeting your personal needs, objectives and circumstances,” says David. “Whilst you can never guarantee that moving them into other funds will achieve better returns and growth for your pension, some of the default pension funds we come across are pretty dire albeit they will need to meet certain criteria on costs and should be selected having consideration to the profile of the workforce the scheme is being provided to.”

Consolidating your pensions

Consolidating your money purchase pension pots into one presents a productive and effective way to simplify the management and administration of your pension's assets, gain greater control of your savings and potentially achieve better returns. Many people who consolidate also find it makes budgeting their retirement easier, as you can forecast your pension’s growth and long-term returns more accurately.  However, some may be worth hanging onto if there are additional benefits such as guaranteed annuity rates or enhanced tax free cash, so each needs to be considered on its merits.

When consolidating your pension, you can stay with one of your existing pension providers, move to a new one or open a self-invested personal pension (SIPP). The greater flexibility can often open new investment opportunities or benefits as well as freedom around how and when you access your money when you are ready to start drawing from your pension.  With the recent abolition of the lifetime allowance it is particularly important for plans to be able to offer beneficiary drawdown options for your nominees and successors to maximise the tax planning opportunities when you die.

While online investment platforms are available to combine your pensions, taking this approach can mean accepting less choice in where your pension savings are invested. Crucially, such platforms will also not offer financial advice, which means you might end up transferring pensions when it is in fact not in your best interest to do so. You could lose some valuable benefits or trigger an exit fee or market value adjustment (MVA) penalty.

“Each individual one of your pensions has to be considered in its own right in terms of whether it's the right thing to move it,” says David. “There are companies out there which advertise quite heavily about consolidating pensions in a matter of minutes. But taking this approach often means each pension isn’t taken on its own merit as to whether or not you should transfer.

“The client with nine pensions, for instance, has enhanced benefits with some of the plans which they wouldn’t want to sacrifice by transferring them. Some older plans are eligible for more than 25% tax free cash if settled prior to a certain date, and some also offer things like guaranteed growth rates or guaranteed annuity rates when you retire. There is great value in consolidating your pensions, but as a financial adviser I'll always be very open and honest with people when the benefits of transferring do not outweigh the benefits you lose.”

Holistic planning advice

Consolidating your pensions is just one part of planning for a successful retirement. A financial adviser will be able to work with you to build a bespoke retirement strategy which meets your individual circumstance and long-term objectives. This includes not just retirement planning and investment advice but also legacy planning, ensuring your loved ones are suitably looked after when you pass, and without being landed with a hefty tax bill.

David Browne“A financial adviser takes the onus of consolidating pensions off of you and will also help you identify funds which better suit your goals and risk appetite, but importantly we’re also able to provide more holistic advice,” says David. “After consolidation, we will discuss what's the best way to take it: annuity, flexi-access drawdown, or a combination of them both? If a client has a large ISA they might draw upon that before their pension in order to save on potential inheritance tax as ISAs fall within the estate whereas pensions currently do not.

“Often people will start drawing from a pension or take the full tax lump sum without realising there's a missed opportunity to reduce their tax liabilities. Have you got a shortfall in your pension? Do you need to contribute more? We can do cash flow modelling to see if a retirement plan is sustainable or if action is required. Beyond just consolidating your pensions, our broader advice puts you on the path to securing your best retirement options.”

This article focuses on the consolidation of defined contribution (DC) pensions. Due to the greater freedoms afforded to DC schemes, including the ability to invest your money how you wish and vary your pension withdrawals depending on your desired lifestyle at different phases of your retirement.  The flexibility of DC schemes means some people on defined benefit (DB) pensions also wish to consider a transfer, sacrificing valuable guaranteed benefits in the process.

Guaranteed benefits are a lot to give up and something the financial services regulator, the FCA, considers unsuitable for most people. Ascot Lloyd can advise how an existing DB scheme could work for you, for example in combination with other assets that can be used more flexibly or whether, because of your particular objectives and circumstances, a transfer might be in your best interests.

Speak to your dedicated adviser or call our client services team to talk through your options and see what is best for your financial future.