Why pension consolidation can work for some, but might not be right for you

If you are like the many UK adults that have multiple pensions, keeping track of all of them can prove difficult. In fact, Unbiased reports that more than £19 billion is sitting in forgotten about or misplaced pensions. 

With many people struggling to keep track of their multiple pensions, some have looked into consolidating their multiple pensions into one. Indeed, research from Canada Life reveals that 58% of savers have considered doing exactly that. 

However, pension consolidation has both advantages and disadvantages and isn’t right for everyone. So, if you’re planning for your future, read on to find out what pension consolidation involves and the situations when it might not be the right move for you. 

Pension consolidation enables you to combine all your pension pots into one

Over the course of a career, it’s highly likely that you will have worked for multiple employers and contributed to multiple different pensions. You may also have started one or even multiple personal pensions. So, pension consolidation is the process of combining of these different pension pots into one.

Before merging your pensions, there are several things you need to consider, including how much all the pensions are worth, how well they are being managed, and what type of pensions they are. 

4 occasions when pension consolidation may not be right for you

Keeping track of multiple pensions can be a challenge, which is why many people consider consolidating their pensions. 

However, there are a few things that you need to be aware of when it comes to pension consolidation and what is suitable for some, might not be for others. Below, are four occasions when pension consolidation may not be right for you. 

1. If you have a defined benefit pension, you could be better served keeping it

Defined benefit (DB) pensions, also known as “final salary pensions”, usually offer a guaranteed income for life based on factors such as your salary and length of service. 

Most are inflation-proof, and many will also pay a spouse’s pension to your partner in the event of your death. 

However, these benefits will normally only be available if you retire as a member of this scheme and would be lost if you transfer your pension elsewhere. So, consolidating this pension into another one could mean you miss out on not only the guaranteed income but also the increased financial security for your loved one.

Consequently, the Financial Conduct Authority and the Pensions Regulator believe that it will be in most people’s best interest to keep their DB pension.

2. If your pension receives employer-matched contributions

If you are an employee, it’s likely that you and your employer currently pay into your workplace pension. In most cases, an employer is legally obliged to contribute 3% of your earnings into your workplace pension. 

If this is the case, it might not be beneficial to you if you transfer this pension to another, as you could lose the employer-matched contribution. 

However, it’s important to note that you may be able to combine other pensions with this one. Speak with your workplace pension provider to see if they would allow you to transfer in other pensions, if pension consolidation is still something you are keen to do.

3. If some of your pensions have certain benefits attached to them

It’s important to be aware of any benefits that you might lose if you transfer from one pension scheme to another. 

For instance, there are certain pension plans that have enhanced tax-free lump sum amounts above the standard 25% or a guaranteed annuity rate (GAR), which could provide you with a much higher annual income than you would otherwise get from a standard annuity.

You could lose these “safeguarded benefits” if you choose to consolidate your pension, so speak with your pension provider before combining your pension with another. Similarly, you could also lose any life insurance built into a plan if you choose to transfer elsewhere. 

Working with a financial adviser could help you to understand exactly what you stand to lose (and gain!) from transferring or consolidating your pensions into one. 

4. If you are close to retirement, the notable exit fees might not be worth it

Often, there can be exit fees involved with transferring out of one pension plan into another. So, when consolidating your pensions, you could be faced with exit fees. 

If you are considering consolidating your pensions and you still have some years until you plan to retire, the cost savings you make in consolidating your pensions and avoiding multiple annual management fees could outweigh the cost of the exit charges.

However, if you are close to retirement age, it may not be as cost-effective for you. Discussing this with your financial adviser could help you to understand whether this would be worthwhile for you or not. 

Working with a financial adviser could give you the knowledge you need

Consolidating pensions is entirely dependent upon your financial circumstances and is not something that is suitable for everyone. If you are considering your options, we can help you establish whether this is the right strategy for you.

If you are planning for the future and deciding what to do with your pension pots, email us at mail@delaunaywealth.com or call 0345 505 3500.

Please note

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results. 

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.  

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.

Workplace pensions are regulated by The Pension Regulator.