Should you combine your pensions?

Holding multiple pensions across different providers is increasingly common, particularly as people move around more in their careers and fund several workplace schemes. This can make it difficult to track and manage your retirement savings. Consolidating your pensions into a single pot can make life simpler, give you more flexibility and even improve your retirement outcomes, but it may not be suitable for everyone. Here, we highlight some of the benefits and risks to consider.

Why consolidate your pensions?

There are several reasons why merging your pensions could be beneficial, although these will depend on your specific circumstances:

Simpler administration

Perhaps the most obvious benefit of pension consolidation is simplicity. Having everything in one place can make it much easier for you to track and manage your pension savings. It will likely mean less paperwork and could reduce costs, and you’ll have only one set of charges to monitor.

Importantly, you’ll also have a clearer view of your holdings and investment performance. This can help you to ensure your portfolio aligns with your goals and risk profile, which will likely change as you get closer to retirement, and make changes if needed.

When you do retire, it’ll be easier to arrange pension drawdown with a single provider. And when the time comes, it will be simpler for your family to sort out any death benefits.

Investment choice

Many workplace pensions, as well as older personal pensions, offer only a limited range of investment options. These tend to be funds, sometimes only those offered by the provider itself, and rarely include listed investments, such as direct holdings in shares or bonds, exchange-traded funds (ETFs) or investment trusts.

Self-Invested Personal Pensions – or SIPPs – offer access to a wide range of investment options, typically including listed investments. They allow you, or an investment manager, to build a portfolio that may better suit your specific investment goals. You also have the flexibility to adapt your strategy and holdings over time, giving you greater control over your choices. SIPPs allow you to access professional investment services, such as Discretionary Portfolio Management (where an investment manager will manage your portfolio for you) or Advisory Investment Services.

However, SIPPs may not be for everyone. A scheme with basic investment options can be convenient if you do not take professional advice or have limited investment knowledge. It may still allow you to meet your objectives and at a potentially lower cost than with a SIPP.

Flexibility in retirement

For many years, the end game for a pension was buying an annuity. Modern pensions offer Flexi-Access Drawdown (FAD), which means there is no obligation to draw funds from the pension, while up to 100% can be drawn at any time. This flexibility may be preferable if you have other income sources, or if you have no need for the pension in your lifetime and would prefer to pass on your pension assets to the next generation.

Many older pensions do not offer this feature and instead may require you to take all your pension benefits by age 75 (normally via annuity purchase, but potentially as a one-off lump sum). If you prefer to have more flexibility, consolidating into a pension which offers FAD, such as a SIPP, could be beneficial.

Death benefits

At the time of publishing, pensions do not typically form part of your estate on death and, with certain providers, can be passed on to your family (while remaining outside of your estate).

Older pensions often feature the most restrictive benefits, with the most likely death benefit being a simple ‘return of fund’ to your nominated beneficiary. With the ‘return of fund’ benefit, the money in your pension is paid directly to your beneficiaries, entering their estate for Inheritance Tax (IHT) purposes (unless the benefit is paid to a trust).

Newer pensions, particularly SIPPs, tend to offer a wider range of death benefits, giving your heirs more flexible options to access your pension funds. Moving your older pensions into a new arrangement could improve the death benefits available to them.

Lower costs

Charges vary across pensions, and you may be able to reduce overall costs (and boost your pension pot) by transferring to a provider with more competitive fees. While fee differences may seem small, they build over time and can have a significant impact on long-term investments like pensions.

What are the risks?

While pension consolidation can help many people meet their objectives, there are also potential risks:

Loss of valuable benefits

Certain pensions offer valuable benefits or guarantees that you would lose on transfer to another provider. Defined benefit pensions, for example, provide guaranteed retirement income (which rises with inflation), and typically offer benefits to your partner or spouse after your death. Some (typically older) pensions offer guaranteed annuity rates, which may allow you to buy an annuity offering a much higher annual income than you would otherwise be offered. These benefits are known as ‘safeguarded benefits’ and if the value of these is more than £30,000, you are legally required to seek financial advice before you can transfer.

Other schemes may allow you to take more than the standard 25% tax-free lump sum, access your pension at an earlier age, or feature in-built life insurance. A qualified adviser can help you understand your specific pension entitlements and how these might fit into your overall financial plan.

Exit charges

Some schemes apply sizeable charges if you transfer your pension to another provider. You will need to consider any exit charges against the potential savings you could make from moving to a lower cost scheme.

Provider security

If you’re choosing to consolidate your pension with just one provider, it’s important to check the level of financial protection offered should anything go wrong. Many pensions are structured under trust arrangements, meaning the assets held in the pension should be safely ‘ring-fenced’ if the provider fails. Where this is not the case, the Financial Services Compensation Scheme (FSCS) may be able to offer compensation (sometimes at up to 100% of the fund, with no upper cap, where the pension is structured as a ‘contract of long-term insurance’).

Deciding what’s best for you

There is no simple answer to whether you should consolidate your pensions, as it very much depends on your individual circumstances. Pensions vary widely in quality, from investment choices and performance to benefits and charges, so it’s crucial to understand exactly what you own, and the implications of making any changes. A qualified adviser can help you through the process and the complexities of pension legislation. They can also help you navigate any changes to pension rules to ensure you’re able to make the most of your retirement.