If you’ve used your spare time in lockdown to get on top of some financial housekeeping, you may have been checking in on your pensions. It might have been a more time-consuming task than you imagined.

If you have multiple workplace pensions, accumulated throughout your career it can be difficult to keep track. You might have private pensions too.

Pension consolidation – moving all your pensions into one pot with a single provider – could save you time and money but it could have drawbacks too.

Whether or not it is right for you will depend on your personal circumstances. Here are some things to think about.

Pension consolidation: the pros

  • Keeping track of your pensions is easier

Your long-term financial goals will be tied into the performance of your pensions, so it makes sense to keep track of how they are performing.

Searching for paperwork and contact details for long-forgotten schemes can be time-consuming. There’s also the chance you’ve forgotten about an older pension pot or simply lost the details.

Putting all your pension scheme eggs into one basket means you only need one set of paperwork and only one provider’s contact details. Receiving just one annual statement for your full pension fund might make budgeting less daunting too.

Try the Pension Tracing Service if you think you might have a ‘lost’ or forgotten pension.

  • Potential for lower charges and increased investment options

If you have multiple plans of different ages, you might not have checked in on them for a while. Schemes will have different fees and differing investment performance. Older plans may have higher charges and fewer investment options.

Consolidating all your plans into a more modern scheme, with lower charges, more investment choice, and the potential for increased fund performance could see your pension pot grow.

Pensions are a long-term investment, so even a small decrease in overall charges could amount to a significant increase in your retirement pot at retirement.

  • You could gain more control

Many modern schemes use online portals to help investors track the performance of their funds and to provide valuations, or options for fund switching.

Online portals can give you real-time access to your investments.

If you’d like to discuss switching options or if you are unsure about the performance of your current fund, please get in touch.

Pension consolidation: the cons

  • You might pay more tax

Putting all your individual pensions into a single plan means having one, larger pension pot. Depending on how you take your benefits once you retire, this larger amount could push you into a higher tax bracket.

An Uncrystallised Fund Pension Lump Sum (UFPLS) is a lump sum payment that you can take from the age of 55. A quarter of the lump sum can be paid tax-free but the remainder is taxed at the highest rate of tax you pay. Not only that, HMRC tax the payment on a ‘month 1’ basis.

This means that the taxable amount you receive is assumed to be a monthly income. You only receive 1/12th of your true tax allowance and are taxed heavily as a consequence. You can claim the overpaid tax back from HMRC, but the process can be time-consuming.

  • There could be multiple transfer charges to pay

Pension schemes, especially older ones, could have exit penalties attached.

If you have multiple, older plans, you’ll need to ensure the combined cost of exit charges doesn’t outweigh the potential benefits of consolidation.

  • You might lose Final Salary scheme benefits

If you have a Final Salary or Defined Benefit (BD) scheme, it’s unlikely that transferring out will be the right option for you.

DB schemes are occupational plans that payout based on your salary and years of service. They might contain a spouse’s pension, paid to your partner in the event of your death, and have favourable ill-health payment options.

These benefits will only be available if you retire as a member of the scheme and will be lost if you transfer. You’ll need to weigh the cost of these benefits against the comparative gains of transferring.

  • Pension scams

Action Fraud saw a huge spike in the number of coronavirus-related scams reported during March, as unscrupulous fraudsters looked to prey on fears and concerns brought about by the pandemic.

An increase in scams means an increased need for vigilance.

In April, a House of Commons Briefing Paper on Pension Scams highlights several common scam types to look out for:

  • Review scams offer a ‘free’ pension review then try to persuade you to move your money into a high-risk scheme. This could be overseas and therefore not regulated, leaving you unprotected. It will likely be sold as a long-term investment too, meaning it might be several years before you realise something is wrong
  • Advice scams offer ‘free’ advice, as a means to obtain personal information and possibly even persuade you to transfer your funds
  • Liberation scams offer to help you access your pension before the age of 55. This is an unauthorised payment and will lead to high HMRC tax charges as well as possible loss of funds

Red flags to look out for include:

  • Any unsolicited offers, either via email or ‘cold-calling’
  • Time-limited offers designed to rush you into making a bad choice
  • Any offer that mentions a ‘guarantee’, ‘free’ pension review, ‘savings advance’ or ‘loophole’

Visit ScamSmart for more information on scams. Also, be sure to check the Financial Services Register to make sure that any person or company you speak to is Financial Conduct Authority (FCA) registered. If any doubt, speak to us.

Get in touch

Whether or not to move all your pensions into one scheme can be a difficult decision and it won’t be right for everyone. If you’d like to discuss your current pension provision and the prospect of consolidating your plans, please get in touch.

Please note:

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.