I’m now in my mid-40s and have moved around jobs fairly regularly, staying in each one for just a few years or sometimes even less. This now means I have eight different pension pots, some with as little as £1,000 in. Will this pose an administrative nightmare when I retire? And should I be looking to combine them into one?’

John, Derbyshire

Tom Selby, AJ Bell Head of Retirement Policy, says:

Don’t worry, John – you are not alone. In fact, knowing you have eight different pension pots from your previous employers means you are a step ahead of many people.

Automatic enrolment reforms introduced between 2012 and 2018 have been successful in getting millions of people saving something in a pension, many for the first time. Under those reforms, all employers are required to offer a pension scheme meeting certain criteria, including minimum matched contributions, to qualifying employees.

However, those reforms have also exacerbated the problem of ‘lost’ pension pots. The combination of people switching jobs regularly – around 11 times on average over the course of a lifetime according to some estimates – and auto-enrolment is creating a vast and hugely valuable sea of retirement money that has become disconnected from its owners.

Each time you move employer, as you have found, you can build up a new pension with a new pension provider. At the last count, over £26 billion of pensions had become disconnected from their owners and were deemed ‘lost’.

SHOULD YOU CONSIDER COMBINING YOUR PENSIONS?

There are plenty of reasons why combining your pensions with a single provider can be a good idea. Most obviously, a single retirement pot is much easier to track and manage than having various pensions with different providers.

You could also benefit from lower costs and charges, increased income flexibility and more investment choice by switching provider.

Older pension schemes, for example, often charge more than modern pensions, while plenty of workplace schemes don’t offer a full range of retirement income options or restrict your investments to the firm’s own in-house funds.

Before transferring any old pensions, you should check there aren’t any valuable benefits attached which you may lose or exit charges that will be applied. Your provider should be able to tell you if this is the case.

The impact of reducing your pension charges can be significant, particularly over the long-term. For example, let’s take two people, Gemma and Chris, who each contribute £2,000 per year to their pension and enjoy 5% investment returns before charges. However, while Gemma pays just 0.5% in charges, Chris pays 1%.

After 30 years, Gemma could have a fund worth around £127,000, while Chris’ pot has grown to around £117,000 – a full £10,000 less.

If you do decide to consolidate with a single provider, assuming these are ‘defined contribution’ pensions – where you build up a pot of money which you can access from age 55 – the process should be relatively simple. Note that the minimum age you can access your pension is set to rise to 57 in 2028.

If you have a ‘defined benefit’ pension valued at £30,000 or more, you will need to take regulated financial advice before transferring. Where defined contribution savers build up a pot of money, defined benefit schemes provide an income for life from a set date, usually based on your salary and the number of years you have been a member of the scheme. Lots of providers will only accept a transfer from your defined benefit scheme where the adviser has recommended you do this.

You’ll just need to choose a provider with whom you want to consolidate your pensions and get the details of the pension or pensions you want to transfer over. Once you’ve given the relevant details to your new provider, they should do all the legwork for you.

You will then need to choose where to invest your pension. When doing this, make sure you are comfortable with the risks you are taking, have a diversified selection of investments and, crucially, keep your costs as low as possible.

Many firms offer a choice of diversified funds designed to meet different risk appetites if you aren’t confident choosing your own investments.

The Pension Tracing Service is a useful tool to locate missing pensions, and some providers also may be able help. 

Hopefully, in the next few years, pensions dashboards will begin to be rolled out which should allow you to see all your pensions in one place, online – although implementation of these reforms has been delayed by the government.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to asktom@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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