Before retiring, the average UK worker will have held ten jobs. As a result, they may end up with ten workplace pensions. But, while pension consolidation allows you to pool all of your pots and transfer them to a scheme where they are all located under one roof, the question is, should you do it?
We have a video discussing this matter. Our CEO and Independent Financial Adviser, Dominic James Murray, explains the various rationales behind consolidating your Defined Benefit pension pots into one and how it can benefit you financially.
//www.youtube.com/watch?v=imyDn557iOE
Watch Other UK Pension Videos in Our YouTube Channel!
Defined Benefit vs Defined Contribution
The most well-known employer-sponsored pension plans in the UK are Defined Benefit and Defined Contribution pension schemes. While they are the most common and share some fundamental similarities, they are two entirely different pension schemes. The primary distinction between Defined Benefit and Defined Contribution is the employee's contribution. In a Defined Contribution plan, the employee contributes a set amount to the pension fund, and the employer may or may not match that contribution.
The Defined Benefit or Final Salary is a pension scheme in which the amount you receive when you retire is determined by the number of years you worked for the company and the salary you earned. They guarantee a fixed income for the rest of your life, which is usually indexed to inflation each year. As a result, the Defined Benefit pension scheme has earned the term the “gold-plated pension.”
The Rationale of Defined Benefit and Defined Contribution Pension Pots Consolidation
Consolidating Final Salary or Defined Benefit pension schemes into a single pot, while rational, does not sit well with the FCA.
They don't think you have to consolidate your Final Salary pension to make it easier to manage or so you have easy online access. They do not consider this a sufficient reason to forego your Defined Benefit or safeguarded benefits, as well as your guaranteed income for life from your Final Salary scheme.
By comparison, with Defined Contribution schemes, there is more than enough justification to consolidate your Defined Contribution schemes because you want to manage everything in one pot.
Reasons to Consolidate Your Pension
Combining your pots should also lower your fees and give you access to a broader range of investments. All of this may lead to a higher pension income and a more comfortable retirement. You might even be able to finish working earlier. Here are some reasons why you should consider consolidating your pots:
Less Administration
If you have numerous pension pots, combining them into a single scheme can save you the hassle of managing multiple pension plans with different providers. It reduces the paperwork because you only have one pension to manage and one company to contact. It can also make it easier to determine whether your fund is on track to meet your retirement objectives.
By combining your pensions on a modern investment platform, you would be able to manage everything online – possibly even via a mobile app.
More Investment Potential
If you have many pots that aren't working hard enough to grow your savings, pension consolidation may be right for you. That is, your pension providers are not making investment decisions that will increase the value of your retirement funds. It can be difficult to keep track of the performance of multiple schemes.
As a result, you may be better off taking control of your money by switching to a newer provider that offers a broader range of investment options than many of the older schemes. It can make tracking the performance of a fund easier.
Save on Fees
Combining your pensions could help you save money on fees. If you have multiple plans, you will be paying for each one's administration, making it difficult to keep track of the total cost. It's also not very cost-effective, especially when some providers are pricey.
Because fees reduce your investment returns and the amount of money you have when you retire, you should select the most cost-effective pension available.
Easier Money Access
Older pension schemes are unlikely to provide flexible access to your money in retirement. Combining your pensions may provide you with more flexibility and more options for your retirement savings. Some schemes established prior to the advent of pension freedoms in 2015 may not be as adaptable as newer pensions.
Prior to 2015, retirees had to purchase an annuity, which provided guaranteed income for the rest of their lives. Income drawdown, also known as flexi-access drawdown, became available in 2015. This allows people to begin withdrawing funds from their pensions at the age of 55.
However, if you continue to invest in an older pension, you may not be able to take advantage of the income drawdown feature. This would imply that you would have to withdraw from your pension in order to begin income drawdown.
Can I Consolidate All My Pensions Pots Into One?
You'd have to transfer out of one or more of them and into another, which could be with an existing provider or a new one. Before you transfer out of a pension scheme, make sure you aren't giving up any valuable guarantees. Exit fees should also be avoided.
We've created a checklist:
- Determine whether your pension plan includes any valuable guarantees or benefits as part of your current package. Think carefully about whether you want to give these up.
- Determine whether your current plan includes life insurance or critical illness insurance, which you may lose if you switch.
- Checking the benefit’s value is especially important for those who have a Final Salary pension, also known as a Defined Benefit pension scheme. If you are fortunate enough to be a part of such a scheme, it almost always makes sense to stay because they provide a guaranteed income for life as well as inflation protection.
- Examine all schemes for exit fees. These kick in if you transfer your pension pot to a different provider. If they are sky-high, moving may be a waste of time.
Can I Consolidate All My Pensions Pots Into One?
If you are unsure whether leaving a scheme is the best option for you, you can seek advice from an independent financial adviser who specialises in retirement planning.
If you require any further assistance on this topic or would like to get in touch, please visit Cameron James' website and schedule your free initial consultation.
