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Should I combine my pensions?

Learn about the benefits of combining your pensions, and gain an understanding of what you should do when you move jobs.

In this article
Should I move my old pensions? Should I consolidate my pensions if I change job?
The impact of high charges on your pension schemes The pros and cons of consolidating your pensions

Should I move my old pensions?

If you've accumulated numerous workplace pensions over the years from different employers, it can be difficult to keep track of how they are performing. It’s not uncommon for people to have 6 or 7 different pensions these days.

There is a danger that long-forgotten plans will end up festering in expensive, poorly performing funds, and the paperwork alone can be enough to put you off becoming more proactive.

A pension transfer could see you moving your money to a new home with another provider. The main reasons to switch will be to reduce the charges on your scheme, particularly if you’ve an older plan with high fees, or to access different investment options.

 

Older pensions can contain ‘exit penalties’. If there are any exit penalties on your existing policy, they could cancel out the benefit of transferring to a new provider.

The other main strategy is to consolidate all your retirement savings in one place, perhaps for similar reasons. So, is transferring everything into one easy-to-manage pension the way to go?

 

Should I consolidate my pensions if I change job?

Making the most of your pensions now could have a significant impact on your happiness in later years; getting it right could mean a higher income and a comfortable retirement, or even an earlier date when you can stop working.

If you’re lucky enough to be in a final salary scheme, it will almost always make sense for the money stay put, even if you’ve left the scheme.

If you have any other type of workplace pension – where success or failure depends on the performance of your investments – consolidation is worth considering.

 

With pension auto-enrolment, your employer is obliged to enrol you into a scheme (which you can then opt out of).

 

The pension won’t automatically follow you if you switch employers. Savers can end up with a separate pension plan from a different provider each time they start a new job.

 

You can leave your old pension where it is or you can move the funds into your new employer’s workplace pension scheme.

 

A pension can therefore follow you throughout your working life and you can switch it as many times as you move jobs, although there may be costs for moving your money.

The impact of high charges on your pension schemes

The negative effect of high charges and poor fund performance should not be underestimated. This should guide your decision on where to leave your pension savings.

If a 35-year-old with a £10,000 pension pot invests until 65 in a fund that achieves 5% annual investment growth, but charges 2% a year, the pot will be worth £23,720. 

The same £10,000 invested in a fund that achieves 7% annual investment growth, with a 1.5% annual charge, will be worth £48,541 – more than double.

A better return will never be guaranteed, but more investment choice and lower fees will give you the best chance of achieving one.

If you’re interested in consolidating, a personal pension, such as a self-invested personal pension (Sipp), can provide a huge amount of investment choice at a relatively low cost.

And if you’re not comfortable tackling big decisions on your own, an independent financial adviser can help.

The pros and cons of consolidating your pensions

Deciding whether to combine all of your pension pots isn’t a straightforward decision. There are clear advantages and disadvantages:

 

Pros:

  • Keeping track of and managing your pension savings is easiest with just one scheme
  • You could gain access to a greater choice of investments if you’re consolidating your pension pots into a Sipp
  • You’ll pay less in overall charges if you put your money into a pension with competitive fees compared to an older plan with high charges

Cons:

  • Opting to use the transfer value to shift money out of a final salary pension is usually a bad idea
  • Some schemes will still have exit penalties, so switching your money out will deplete the size of your pot
  • Older pots may have some attractive features that you’ll lose if you transfer out, eg early access, more than 25% tax-free cash or guaranteed annuity rates
  • There are other tax advantages of keeping pots separate – you can take three pots of up to £10,000 which are deemed ‘trivial’ and don’t count against your lifetime allowance or trigger a cut in your annual allowance due to the Money Purchase Annual Allowance rules

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