Should I consolidate my pensions?

Pensions aren’t what they once were. Life and the patterns of employment have changed a great deal since the time when people used to hold the same job for most of their working lives. Nowadays, many clients will approach me after having held a few different jobs in their lives and ask me “should I put all my pensions together?”

It is not uncommon for people to file their annual pension statement in a drawer without much thought, before one day deciding that that they should probably learn how much they’ve accumulated. More than once, I have had clients arrive with carrier bags full of neglected pension paperwork. If this sounds like you, you’re not alone.

As chaotic as this might sound, it’s not a problem. As a financial adviser, all I require is the provider’s name and your policy number in order to write to the provider on your behalf. Should you consolidate your pensions? Maybe. Should you review them at the very least? Definitely.

If you’re concerned that your knowledge of pension planning is limited, then pass that worry on to a financial adviser. There really is no sense in risking trying to navigate an area in which you are not an expert and making mistakes could be costly. As a financial adviser, managing these financial planning dilemmas is what I do day in and day out and pension planning is a core part of this.

The real question is not ‘should I consolidate my pensions?’. A more fundamental and closely related question is ‘should I plan for retirement?’ Yes, you should. Fewer and fewer people have a final salary pension and therefore the value of what you can save will be a main factor in determining the income you can safely take at retirement.

One of the ways in which a financial adviser, such as myself, can help is by explaining how any recommendation meets your long-term needs. This will result in a bespoke financial plan tailored to your personal needs. For example, considering the volatility (risk) of your investments and achieving a well-diversified asset allocation that matches your appetite for risk. There is no right or wrong here, it’s very personal: too safe and the funds may not grow enough to meet your retirement objectives; too risky and you may lose more than you are comfortable in a downturn.

Another area of financial planning I always try to demonstrate is how your savings will benefit you at retirement. To illustrate this, I refer to the power of compounding. If someone with no pension saved £500 per month for 20 years, they would have saved £120,000. But with a 5% return net of fees year on year the value would be £208,316. The same contribution with a 2% year on year return would only have £148,700. This is a difference of £59,616. Moreover, if the individual had a starting pot to begin with, the difference would be far greater still.

This is for illustrative purposes only but hopefully highlights how important it is to review your pensions and ensure they are invested correctly. Whether I ultimately advise you to transfer none, some or all your pensions will require an assessment of your individual circumstances, but I can run over some generic pros and cons.

Pros

• Likely to pay less in charges with fewer administrative fees. Some older plans do have excessive charges as well.
• Life admin will be a lot easier when you have fewer pensions to manage.
• You could have greater investment choice and potentially a much greater return.
• Some older plans do not allow flexible access in the same way that some more modern arrangements do.

Cons

• There could be exit penalties
• Some older plans may have some safeguarded benefits (such as guaranteed annuity rates or more than the standard 25% tax-free cash entitlement)
• There could be tax advantages to keep separate pots.

Ultimately, it pays to take advice whatever action you decide to take. Given that the initial meeting is provided free of charge, discussing how consolidating your pensions could be of benefit seems a process worth exploring for anyone.

Please note that this article is focused on defined contribution pensions and is not reflective of final salary arrangements.

If you feel you could benefit from a chat about your pension arrangements, then please do pick up the phone and arrange a meeting.