Pension Consolidation: What are the advantages?
What are the advantages of consolidating your pensions? Data released this week has revealed that over 40% of Brits have 3 or more pension pots, with almost the same percentage of people surveyed admitting they had lost track of them. 1 in 5 men in the UK have more than 5 pension pots and the same statistic applies for Londoners regardless of gender.
This in not surprising given that on average people have 6 or more jobs over their lifetime, and since the introduction of auto-enrollment they will accumulate pension benefits at each employer. So, why is this a problem?
The biggest issue is administration. 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.
The most difficult administrative area will be with regards to pension allowances. 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. 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.
The same issue will appear with regards to drawing down from your pension. 25% of your pension assets can be taken tax free. The other 75% that is taxable is paid to you net of tax. The scheme will automatically pay this tax on your behalf before sending you a requested withdrawal, much in the same way you receive your income from an employer net of tax. If you are drawing from multiple pensions, it is likely you will end up overpaying or underpaying. This can quickly become an administrative nightmare.
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.
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.