I’ve seen Government plans for people to have one pension pot for life instead of different ones for each job. What has been proposed and should I wait for the changes to be implemented before consolidating my existing pensions?

Anonymous

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

The ‘pot for life’ pension reforms floated by chancellor Jeremy Hunt at the Autumn Statement on 22 November are an attempt to reduce the number of retirement pots someone builds up over their career. Some estimates suggest workers will change employer around 10 times on average during their working lives, with each job switch potentially creating a new pension with a new provider.

According to the Pensions Policy Institute, a respected think-tank, ‘lost’ pension pots in the UK are worth somewhere in the region of £27 billion, with the challenge exacerbated by automatic enrolment reforms which require employers to establish a pension scheme for their staff. Advocates of the pot for life reforms argue that by allowing workers to keep their existing pension when they change jobs (or potentially choose another pension), the number of new pension pots created could be drastically reduced.

Employees could also benefit from extra choice and flexibility if pot for life becomes a reality. At the moment, while some firms may offer an alternative to the main workplace scheme, such as a SIPP, or a bit of choice over your auto-enrolment investments, they don’t have to. Often you will just have the default investment charge-capped investment and possibly a limited range of the provider’s own funds to choose from.

However, there are still some fairly major roadblocks in the way to pot for life becoming a reality. Most obviously, requiring employers of all sizes – from corner shops to multi-national corporations – to potentially connect to dozens of different pension schemes is no small task. The Government acknowledges a ‘clearing house’ would need to be built to facilitate this - something which would likely require significant time and resource.

This is perhaps one of the reasons the Government has only published a ‘call for evidence’ on these plans, rather than a ‘consultation’. Realistically, there is little chance the reforms will progress from idea towards reality before the general election, whenever that happens.

CONSOLIDATING YOUR PENSIONS

You therefore shouldn’t base your decision on whether to combine your existing retirement pots on a reform which may or may not ever see the light of day. There are, however, plenty of potential benefits to getting all your pensions in one place. 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.

The impact of reducing your pension charges can be significant, particularly over the long term. For example, someone who contributes £2,000 per year to their pension and pays 1% in charges could end up with £10,000 less in retirement than someone who pays 0.5% in charges.

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 least £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.

DECIDING WHERE TO INVEST

You will then need to decide 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. AJ Bell, for example, has a ‘Pension Finder’ service.

DISCLAIMER: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (Tom Selby) and the editor of the article (Tom Sieber) own shares in AJ Bell.

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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