Should You Combine Your Pensions

Should You Combine Your Pensions? The Pros and Cons!

Introduction:

So, you are thinking of consolidating your pension pots, but you don’t know where to start. 

Throughout your life, you will have accumulated several pension pots, particularly since the automatic enrolment policy came into effect in 2012. With the average person changing jobs every five years, that is a lot of pensions to keep track of. 

If you find yourself asking “Should I combine my pensions,” then pension consolidation could be your answer. You can combine your various pension pots into one, reducing how much you pay for your plan, and reducing the amount of paperwork you need to keep track of your money for when you retire. 

The Openwork Partnership can help you plan for retirement with its dedicated, national team of financial advisers. However, if you are looking to combine your pension plans, then this article can help you gain an understanding of the process. 

Assessing Your Pension Portfolio: Is Consolidation Right for You?

Consolidating your pension can give you more control over your finances with retirement in mind. However, various factors could impact this choice and might not leave you better off in the long run. 

To find out if consolidation is the best option for you, you will need to make a list of the pensions that you have and note down the type of pension it is for each one. Looking at the paperwork for your different pots, make sure to assess the charges that you might incur by transferring out, but also look at the benefits of remaining with that pension plan as well.

There are two main types of private pensions: 

• Defined Benefit Pension Schemes

Usually arranged by your employer, they are also known as ‘final salary’ or ‘career average’ pension schemes. This type of scheme is usually based on your salary and how long you worked for your employer. When you retire, the pension then agrees to pay out a certain amount each year based on these factors. 

• Defined contribution pension schemes

These can be either a personal or a stakeholder pension, also known as ‘money purchase’ pension schemes. These pensions can be set up by you or your employer, and they are based on the amount of money that is paid into the pot. This money is then invested by your provider and the value can go up or down depending on the investment's performance.

Most defined benefit plans can be transferred over to a defined contribution plan, so long as you haven’t started receiving money from them. However, a defined benefit plan has the potential to give you some nice benefits, so make sure you take this into account as you do not want to be financially worse off if you decide to consolidate. 

Please note that you cannot transfer some public sector pensions. This includes the Teacher, Civil Service, and NHS schemes. 

The Benefits of Pension Consolidation:

There are some great benefits to consolidating your different pensions into one single pot. 

Firstly, having a single pension to manage and keep track of is much less stressful. You can keep an eye on your retirement funds easily, reducing the complexity and the amount of time spent on organising your finances. Consolidation can also reduce the impact of administrative fees and pension provider charges on your overall fund. Essentially, combining your different pensions is both cost and time-effective. 

Another plus is gaining access to a wider range of investment choices. In particular, if you are combining your older pension plans into a new one, the choice of investments for modern plans has a better variety than older versions. 

Furthermore, combining your pensions can offer more flexibility for retirement. Older pensions do not have the same withdrawal options as newer plans, meaning that any pension pot older than 2015 might not have the ability to flexibly withdraw income once you hit retirement. 

The Downsides of Combining Pensions:

Whilst combining your different pots might seem beneficial to you, there are some reasons why you should not consider consolidating. 

For example, if you have a plan that is a ‘final salary’ pension, consolidating is not recommended. This type of pension has very defined benefits and can provide an income for life and often rises with inflation. Consolidating this pension could see you lose those valuable financial benefits. 

Additionally, if you have a pension that includes guaranteed annuity rates, protected free cash, or even a guaranteed minimum pension, then it would be best not to touch this, as consolidating would result in the loss of these benefits. Make sure to check with your provider if safeguarded benefits apply. 

You should also reconsider your choice to consolidate if your pension receives employer-matched contributions. Transferring this type of pension whilst you are still paying into it could risk losing access to the contributions your employer has made.

Lastly, it is important to make sure that the transfer of funds from one plan to another doesn’t incur cancellation fees. If the fees are too large, then you should think about whether transferring is worth the reduction to your overall pension value. 

Making an Informed Decision: Seeking Professional Advice:

Pension consolidation can be complex, with several variables that can affect the end result. Such variables can include: 

• Tax variables and market shifts
• Pension rules
• Individual circumstances
• How far away from retirement you might be 
• The type of pension

You can use the experienced advisers from The Openwork Partnership to help you make an informed decision. They can help you create a bespoke strategy that will make managing your pensions easier and maximise your pension’s value despite economic or market changes. 

Use this handy tool to help you find a financial adviser near you. 

Conclusion:

Pension consolidation is a fantastic option if you have multiple pots and it is hard to keep track of them. Consolidation is also a great idea if you have a couple of older plans that have less flexibility, you can bring them together into one pot and reap the benefits of a modern plan. 

However, depending on the type of pensions you have, and the benefits that you get from them, there may be better choices than pension consolidation for you. You will need to make sure that you analyse and review each pot you have and make a well-informed decision about what you would like for the future of your retirement fund. 

Reach out to The Openwork Partnership today and explore your options with valued, confident, and expert advice. 

The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen. For specialist tax advice, please refer to an accountant or tax specialist