Should I consolidate my pensions?
If you’ve changed jobs several times you’ve probably got lots of pensions with different providers.
It can be difficult to keep track of how much money you’re building up, which makes consolidating your pensions into one pot a tempting option.
But transferring can sometimes result in high charges and the loss of valuable guarantees. It’s extremely important to check the terms and conditions of your policies and weigh up the pros and cons before proceeding.
It’s a lot easier to manage one pension than it is to manage five. You can see how much money you’ve saved, there’s only one annual statement to read and it’s simpler to track and switch investments.
Modern pensions let you see where your pension is investing and how it’s performing in real time, so you can figure out if you’re on track to meet your financial goals.
Consolidating your pensions can also give you greater control. Alistair McQueen, head of savings and retirement at Aviva, says your current pension may limit your fund choices or, in the case of some trust-based pensions, the trustees may dictate the fund you must have.
If the new pension allows for self-investment you’ll have far greater choice. You can pick the investments that suit your individual risk profile and capacity for loss.
You could even end up with a bigger pension pot. This is because older pensions often have higher charges, so moving your pension to a modern one could reduce the cost of administration and fund management.
‘A small reduction of 0.5% a year might not sound like a lot, but it could increase your eventual pension pot by 15% over your whole working life,’ McQueen says. ‘Charges are also usually lower the bigger your pension pot is.’
It’s not a good idea to transfer a workplace pension in which you are still an active member. Your employer will be paying in money and you’ll probably lose this contribution if you decide to stop the pension and transfer it.
Even if you have pensions in which you’ve stopped contributions, transferring might not be the right decision.
McQueen says that although old pensions generally have higher charges, this isn’t always the case.
In addition, some older pensions pay loyalty bonuses, which are added if you keep your pension for a long time. You should weigh up the value of the loyalty bonus against any advantages a new pension would bring, such as lower ongoing charges, more choice and greater flexibility.
Anyone owning a with-profits policy could be subject to a market value reduction (MVR or MVA) charge when transferring out. Phoenix Group says these exist so the true market value of a policy is paid, ensuring the remaining policyholders in the fund aren’t disadvantaged.
If you’ve ever been part of a defined benefit/final salary pension scheme or if you have pensions with guaranteed annuity rates, it’s important to check what will happen to these guarantees if you move your money.
If you’ve got a pension with guaranteed benefits that’s worth more than £30,000, you have to take independent financial advice before you move it.
What costs are involved?
Some pension providers will apply early exit fees when you transfer out. Jasper Martens, spokesperson for PensionBee, says he’s seen some instances where the fee has been in excess of 75% of the pension’s value.
Exit fees are becoming increasingly rare but it’s worth clarifying with your provider what the charges will be.
You may also incur financial advice fees and the less obvious cost of time out of the market.
‘During the time between the old plan closing and the new plan starting, the money won’t be invested anywhere so people could lose out on market increases. Of course, the opposite is also true – they could benefit from falling markets,’ explains Jamie Clark, a business development manager for Royal London.How long does a transfer take?
Transfer times can vary hugely. Thornton Wells, wealth management consultant at Mattioli Woods, says some insurance-based contracts transfer in a matter of days whereas older contracts can take weeks.
Some providers use an industry standard transfer process called Origo. It takes around six to eight weeks, but if the providers have good service levels and it’s not a complex case it can take eight days.
What else do I need to consider?
There are lots of things to think about before transferring to another pension.
Look at whether the new pension offers the investment choices you want and all the options you need, such as regular income withdrawals, ad-hoc withdrawals and the ability to view and change your investments online.
Analyse the charges. McQueen says some pensions have a single fee whereas others have fees for taking income withdrawals, buying and selling investments and buying an annuity.
‘You should consider the charges you will pay depending on how you plan to use your new pension, both now and in the future,’ he adds.
Other factors to consider include whether the provider has an exit fee and what their customer service is like.
How do I consolidate?
Once you’ve chosen a pension call the new provider and ask them if they offer a service that helps you consolidate your pensions.
Most will write to existing providers on your behalf to get the necessary paperwork, so all you have to do is sign and return the forms. Once you’ve returned the forms, the transfer can go ahead.