Multiple Pension Pots: The Case For & Against Consolidation
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincoln or other local offices.
In today’s highly-mobile workforce (historically speaking) it isn’t uncommon for many people to have several pension pots from different employers – even from your twenties. This has become even more common since the government’s introduction of auto-enrolment in October 2012, which now requires almost all employers to put staff members on a workplace pension scheme. At the end of one’s working life, therefore, it isn’t unreasonable to expect to accumulate as many as 6, 12 or even more separate pension pots.
As financial advisers, we’ve helped many clients in Grantham, Lincoln and Nottinghamshire who find themselves in this position. In this article, we explore some of the reasons for keeping your pension pots separate in your retirement plan, and some arguments for consolidating them. We hope you find value in this content. If you would like to discuss any of these matters or discuss your own financial plan with us please get in touch to arrange a no-obligation financial consultation, at our expense:
The case for consolidation
Perhaps the best reason to consider bringing all of your pension pots into one is that it greatly simplifies things. Trying to manage 10+ pensions and speak to the administrators of each one, by yourself, can be overwhelming. With so many pensions, moreover, it’s easy to lose track of some of them or not give certain pots the attention they need for your financial plan.
Yet there are other reasons that might make consolidation the right option for some people. Charges in older, non-workplace pension funds, for example, are often higher than in new schemes – perhaps as much as 0.5% more compared to a fund you might open in 2020. So, moving your savings to another pot could reduce your ongoing costs. Indeed, according to one report by the parliamentary Work and Pensions Committee, charges on small pension pots can sometimes even eradicate the value of the pot altogether.
There is also the matter of access. Older funds are likely to have relied on traditional means of communication for many years (i.e. post and telephone). Websites and other digital platforms, therefore, are often non-existent, out of date or difficult to use. Consolidating into a new, single pot could make it much easier to access, monitor and manage your funds online. Finally, there is, of course, the matter of performance. Older funds do not necessarily perform less well when compared to newer funds, yet some of your many pension funds may not be reaching the full growth potential available to you. A new, consolidated pension pot which is properly diversified and asset-vetted could be a great way to rectify this.
Reasons to keep pension pots separate
Here at Castlegate, there have been occasions where our financial advisers have suggested to clients in Grantham and Lincolnshire that certain pension pots be kept separate, rather than consolidated. The reasons are diverse but important. Here are some examples:
Exit charges. Some pension schemes will levy a charge if you decide to take the money out of the fund, to put elsewhere. These vary depending on the scheme in question, yet sometimes the charge can be high enough to not make a withdrawal worthwhile. In other cases, it might still make financial sense to “take the hit” and put the money into another scheme anyway, since you may be better-off in the long-term anyway.
Scheme benefits. Certain older pension schemes may offer some very good benefits which could make them worth holding onto. Final salary pensions, for instance, are often a great scheme to retain due to the guaranteed, inflation-linked lifetime income which they offer an individual in retirement.
Tax advantages. It can sometimes make sense to keep certain pension pots separate for tax purposes. In particular, you can take three pots of up to £10,000 without this affecting your Lifetime Allowance (or without triggering the Money Purchase Lifetime Allowance rules, which reduces the amount you can contribute towards your pension each year).
Conclusion & invitation
At this point, it’s important to highlight the impact of high scheme charges and poor performance upon your funds. If your fund charges 2% per year, for instance, then over the course of your working life this will significantly reduce the overall growth of your pot. Compared to a fund that charges 1.5%, over 30 years this pot could be twice as large as the former – even if both have an average annual return of, say, 8%.
It isn’t possible for a financial adviser to guarantee that a certain fund will perform better than another (although the prospects might be better). Yet fund fees and charges are areas of your pension(s) which are typically much more in your control, and could make a big impact on the overall size of your funds and lifestyle when you retire.
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense: