Pensions are perhaps one of the most complicated areas of personal finance and, unsurprisingly, one that many people put off dealing with. And yet it’s something that all of us will come to rely on at some point, in some form or other.
That’s why the government introduced automatic enrolment in 2012 – where employees are automatically enrolled into workplace pension schemes – with the scheme since rolled out across the country.
But it’s created a new problem – every time you move jobs, you get a new pension pot, with the possibility of accumulating dozens of them over your lifetime. It got me wondering, should you be merging these pensions into one big pot or leave them as they are?
To find out, I asked Ian Browne, pensions expert at wealth management firm Quilter, about the ins and outs of merging your pension and what to look for.
Should you merge your pensions?
First, let’s start with the question of whether you should be merging your pensions at all.
According to Browne, it all “depends on the individual and the type of pensions they hold”.
He said: “Consolidating all your pensions into one is a good way to get your retirement saving organised, be more engaged with your pension and improve your understanding of your pension. As final salary pensions are now a thing of the past for many, it has fallen on ourselves to take control over our own pension savings with the help of our workplaces through auto-enrolment.
“As a result, having them all in one place can make things easier to understand, allow you to feel more in control and ultimately help you make better decisions about how much you are saving and how much you can take out throughout your retirement.”
What are some of the pros and cons?
Let’s start with the benefits – and simplifying your pensions portfolio is the most obvious one.
“Firstly, having all your money in one place allows you to keep track of your retirement saving and makes it easier to see how it is doing,” Browne explained. “You will also cut down on the amount of information you receive so it shouldn’t be as overwhelming as multiple pots.”
Another benefit is that you could actually save money by merging your pension pots. Every pension charges a management fee as a minimum and they vary widely.
“There are some pensions out there that charge considerable amounts, while others charge much less so it is better to consolidate them and shop around for the best deal,” according to Browne.
But before you start consolidating your pension pots, be aware that there may also be costs associated with doing so.
Browne explained: “Firstly some pension providers charge you an exit fee – essentially you have to pay to move your pension elsewhere. While the regulator is attempting to crack down on this, they do remain so you need to see what level they are at.
“Furthermore, some pensions come with guarantees, such as guaranteed income payments. Therefore if you move that pension to another provider that doesn’t offer the same terms you will lose the benefits.”
Are there any pensions you would recommend leaving in their pots?
Browne says: “You need to consider if it is in your best interest to relinquish some guaranteed benefits that you may wish to rely on later in life.”
Specifically, these include additional death benefits, a higher tax-free lump sum, a pension for your partner after you die, or a Guaranteed Annuity Rate (GAR) option.
“These are becoming increasingly rare so should not be dismissed lightly, and if you are in doubt it is important to take advice before you let these benefits go,” according to Browne
“Another thing to consider is the investment choice and costs of one pension vs the other. By consolidating to the cheapest pension you may be restricting yourself when it comes to the choice or quality of investments on offer.
“Not all pensions give the same options, so it is important to do some digging into what you are invested in, how it aligns to your goals and values and how much it costs you to own it. Both high fees or poor investment performance can have a draining impact on the size of a pension pot so it is important not to overlook these.”
Can pensions be too small or too big to merge?
“In principle there are no minimums or maximums,” according to Browne. “However, you should assess the benefits of transferring against the cost of doing so to see if it would be worth it.”
How do you decide which pension to keep?
Let’s say you already have a small handful of pensions – how do you decide which to keep? And should you move them all into a new pot?
According to Browne: “You should be looking to keep costs down as much as possible, without compromising on investment choice or performance. There are typically costs for managing the pension (a service charge) as well as costs for managing the assets the pension is invested in (an investment fund charge)
“If you have a number of pensions and are simply unsure where to start, getting some financial advice or guidance from a professional will help you with your journey.”
When should you merge your pension?
As for when you should merge your pension – if that’s what you decide to do – Brown says “the sooner the better”.
He explained: “The last thing you want to be doing before you retire and enjoy no longer having to work is sorting out and consolidating your pensions into one. If anything, this could have an impact on your financial position at the start of your retirement if things aren’t set up correctly for you to receive an income.
“Therefore you shouldn’t let things build up until the last moment as this is also when things will end up forgotten about. It is always wise to keep on top of your finances, so when you start a new job and you are enrolled into the pension scheme, that is an ideal time to consider if you should be bringing your old workplace scheme with you.”