Pension Consolidation

A typical working pattern for most people means they are likely to have many different jobs during their working lifetime. It is also common to have various pension arrangements from the time in each job. So, people can end up with multiple pension pots scattered around, and without any form of joined up strategy towards them. This is because the pensions have not been co-ordinated around a specific approach, but simply accumulated with each job.

This, or something similar, may represent your position and if it does you may wish to consider consolidating your pensions.

Pension consolidation is when you decide to bring your pensions together into one plan. This can be attractive and comes with several possible advantages. The first advantage is that everything in one place could make things clearer, easier to manage and control. Secondly, you could save on costs or charges if you can transfer from higher-cost schemes to a low-cost one. Thirdly, putting your plans together should offer you a greater number of investment options with a wider choice of investment types and funds. This could help you enhance the longer-term performance.

It is always worth looking carefully at both charges and performance as any improvement can have major impacts.

Take the example of a pension, which has £10,000 as its current value, with charges attached to it at 2% per year. In the future, it produces an investment return of 4% per year. In 30 years’ time, that pension will have grown to £18,114. Now compare this to another £10,000 pension, which grows at 6% with charges of 1.5% per year. In 30 years, this will be worth £37,453 pounds.

Consolidating combines easier management, less paperwork, and less to keep track of, with potentially better overall terms. To consolidate past pensions into one plan is often attractive, but before doing so you should be wary of some potential disadvantages. If any of your pensions were a “defined benefit pension scheme”, they would probably have a minimum or guaranteed income at retirement, which is difficult to replace, and you should generally be very cautious about moving this type of pension.

In a similar way, some older schemes, regardless of their type, may have other forms of guarantee that could be valuable, and many older schemes of any type could have transfer penalties, which would mean you pay a cost of moving them to your new scheme.

You will note that this is not a simple decision, because the devil is in the detail, and whether to transfer any pension, whether consolidation is a good or bad idea, is very much dependent on your specific circumstances.

Of course, consolidating can be applied to some of your past pensions, it doesn’t have to be all of them. For example, if you have five old pensions, there is nothing to stop you merging four and leaving one where it is, possibly because of its guarantees, which you would want to keep. There are many times when consolidating makes perfect sense, but it is not always the case, and you should carefully check the terms on your past pensions and use an expert to help and advise you.

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