Pension consolidation, what are the benefits?
It is not uncommon for people to have more than one pension in the UK. Often when people have moved jobs they have started contributing into a new scheme. Some people have done this multiple times and as such have many small pension pots with different administrators. There are a number of key benefits to consolidating these pots into one pension:
Multiple sets of fees
One of the issues with having multiple pension pots is that each pension scheme will have its own set of fees. Getting a clear picture of how much you are paying in fees is a lot trickier if they are different amounts across your pensions. They may also be structured differently from one scheme to another. With some schemes, for example, when the fund value of the pension goes above a certain amount, you receive a discount on your whole pension which you may not qualify for if you spread the contributions across different providers. Putting them all in one place means you will easily know exactly how much you are paying.
Receiving multiple reports from different schemes makes it harder to keep track of how your pensions are doing. Managing the administration on one scheme is always going to be easier than having to request information from multiple administrators, who will all have different response times, and then having to submit requests for changes to all the different schemes who will most likely take different times to then implement your requests.
Drawing down from multiple pensions in retirement is also likely to mean increased admin compared to dealing with just one scheme. Receiving your pension income from different sources can be messy and make your financial accounting difficult.
On a slightly morbid note, but worth thinking about given its inevitability, is what happens after you pass away? Having inheritable pension assets in many places will make processing your estate more complicated and potentially then make that a more drawn out process than it needs to be. It is also easier to keep the beneficiaries up-to-date on one scheme to insure all your assets go where you want them to.
As people get closer to retirement their risk profile changes. There can be numerous other reasons for someone’s appetite for risk to change over time. Ultimately, when this happens you need to be able to make changes to the portfolio easily in order to re-balance the investments. It is also likely that if you have different funds in different pensions, there will be an overlap in the underlying assets in those funds. This could mean you are over exposed to certain stocks or geographical regions without even realising. Performing analysis on one portfolio will result in a clearer picture of how your money is invested and can mitigate unseen risks caused by incorrectly balanced portfolios.
Currently, individuals can contribute £40,000 a year into their pensions without attracting a tax charge. If you don’t use it, you may be able to carry over any annual allowance you didn’t use from the previous three tax years. There are also situations where you may have a lower annual allowance, so it is better to work with an advisor when managing your pensions.
Calculating your remaining tax-free allowance on multiple schemes, especially in the instance you need to use the carry-over from previous years, will be a complicated process.
Taking an interest
The biggest issue we see is people simply not taking an interest in their pensions and how they are invested. Just going through the process of reviewing all your pension assets with an adviser will put you in a much better position. If you choose to then amalgamate them all into one, you can create a structure that makes it easy for you to monitor how it is performing.
It is worth noting that there are many things to consider before moving any pension. Some schemes may offer benefits that you lose out on should you leave, so there could be cases where leaving the pension where it is makes more sense for you.
If you have pensions in the UK, get in touch with us for a free no obligation review.