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Should I Consolidate My Pensions?

Here at Consolidation Expert, we break down the risks and potential benefits of consolidating your pensions.

Have you accumulated multiple pension pots over your working life? If consolidating them into one pension is on your mind, there are some key considerations to weigh up first.

Here at Consolidation Expert, our financial specialists are on hand to provide impartial guidance on pension consolidation. We’ll outline the pros and cons, steps involved, and important factors to assess when deciding if combining your pensions is right for you.

Consolidating pensions, or consolidating any kind of loan, can make management simpler and may reduce fees. However, it also means putting all your eggs in one basket and needs careful financial planning. This article will help you make an informed decision.

Key Takeaways:

  • Consolidating pensions combines multiple pension pots into a new single plan. This can simplify management.
  • Main benefits are consolidated investment management, reduced fees, and easier tracking. Drawbacks include risk of poorer returns.
  • Key factors to consider are your investment risk tolerance, pension types and rules, fees charged, death benefits.
  • Shop around for the best consolidation deal rather than automatically opting for your current provider.
  • Take impartial financial advice based on your full circumstances and retirement plans when deciding.

What Is Pension Consolidation?

Pension consolidation involves combining two or more separate pension pots into one single pot, held under a new consolidated pension plan.

For those who have accumulated multiple pension plans over their working life – for example through various employers – consolidation may seem an appealing option to consider.

Consolidating your pensions essentially means transferring the savings you have built up in old pension plans into a new combined pension arrangement.

Potential Benefits of Consolidating Pensions

There are several potential benefits to consolidating your pensions:

01. Simpler Administration

Having all your retirement savings under one pension can remove the need to manage and keep track of multiple different pension plans and policies. This administrative burden is replaced by overseeing just one consolidated pension pot.

02. Clearer Overview of Savings

Seeing all your retirement funds in one place can provide greater clarity and oversight into your overall savings. Rather than having to check on multiple pensions, you can see your total savings and projected retirement income all in one.

03. Reduced Fees

Consolidating retirement savings into a new pension arrangement may reduce ongoing administration, management and advisory fees. Combining multiple pensions can lead to economies of scale and remove overlapping costs and charges.

04. Avoid Losing Track of Old Pensions

Having old pension plans with small amounts of money in them could mean you lose track of these savings over time. This is especially likely when changing employers frequently. Combining them into one pension ensures better visibility of all your retirement funds.

Potential Drawbacks and Risks

However, consolidating pensions also carries some downsides and risks to weigh up:

01. Consolidated Fund May Perform Worse

There is no guarantee that putting all your pension savings in one basket will lead to better investment performance. It could actually achieve poorer returns than keeping the savings in separate professionally invested and diversified pots.

02. Loss of Unique Benefits and Perks

Older pension plans may come with certain associated benefits and perks that will likely be lost if transferred into a new consolidated arrangement. For example, some have generous death benefits or other guarantees.

03. Exit Fees Can Be Expensive

While ongoing fees may reduce, extracting funds from old pension plans can come with hefty exit penalties and transfer fees which eat away at your savings. The upfront costs may outweigh any longer-term savings.

04. Difficult to Reverse Consolidation

Once you have consolidated multiple pension pots into one place, unpicking this later is complex and comes with costs and tax implications. The decision is difficult to reverse.

05. Breaching Lifetime Allowance

Combining substantial pension savings could push you over the lifetime allowance threshold, triggering tax charges. This risk needs accounting for in any consolidation plan.

What Types of Pensions Can Be Consolidated?

Whether particular pensions can be consolidated depends on the type of pension and specific scheme rules. There are various limitations and regulations to consider:

01. Personal Pensions

Most personal pension policies will allow transfer of savings into another personal or workplace pension arrangement. This is usually a straightforward consolidation process.

02. Workplace Pensions

The majority of workplace and employer pensions can be transferred into a new workplace pension scheme or personal pension. However, some workplace pensions – especially older legacy plans – may not permit transfers out.

03. SIPPs

Self-invested personal pensions (SIPPs) can readily be consolidated into another SIPP provider or personal pension policy. The invested assets within the SIPP will need to be sold and transferred as cash.

04. Final Salary Pensions

Also known as defined benefit pensions, final salary pensions generally cannot be transferred out or consolidated, except in very rare cases. The highly favourable and valuable guaranteed benefits provided by these plans are usually lost if transferred.

05. State Pension

The state pension provided by the government cannot be consolidated as it does not represent a pension pot that can be transferred. However, projecting your state pension income is still important for retirement planning and assessing your consolidation needs.

Key Factors to Consider When Consolidating Pensions:

Deciding whether consolidating your pensions is the right move needs careful consideration of how it could impact your retirement finances and income both now and in the future.

01. How You’d Like to Invest

What is your personal appetite for investment risk as you approach retirement? Consolidating into more conservative low-risk investments can reduce volatility and protect savings if retirement is nearing.

02. Fees and Charges

The upfront exit and transfer fees along with future management costs can significantly eat into your pension savings, outweighing any projected long-term savings.

03. Death Benefits

Some pension plans come with valuable guaranteed death benefits, ensuring a minimum payment or income for loved ones upon your death. Replicating these protections may not be possible if you consolidate out of the plan.

04. Performance of Existing Funds

Review how your current pension funds and chosen investments are performing. Is there a strong case for consolidating poorly performing funds? Or would consolidating well-performing funds actually hamper future growth?

05. Retirement Plans

Think about your overall retirement plans and vision. For example, are you aiming to phase into retirement slowly? Consolidation may impact certain options, so consider end goals.

06. Seek Impartial Financial Advice

Given the complexities and implications involved for your retirement finances, seeking guidance from qualified independent financial advisers could be hugely valuable before making decisions.

How to Find the Best Pension Consolidation Deal:

If consolidating your pensions does make sense for your situation, it’s important to shop around rather than automatically combining them into one existing pension you already hold. Follow these tips:

  • Don’t limit yourself to just looking at pension providers where you already have policies. Use pension comparison sites to compare the whole market.
  • Look for pension consolidation products offering low management fees. High ongoing fees could seriously erode your retirement savings over time.
  • Think about the level of flexibility you want when accessing your pension savings after consolidation – income drawdown, cash lump sums etc.
  • Consult an independent financial adviser who can suggest the most suitable pension plan to consolidate into based on your needs.
  • Take your time researching the pension consolidation market – it’s your future retirement income, so getting the right solution matters.

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We hope this article has covered the key advantages, risks and factors to consider when deciding whether to consolidate your pensions. While it may seem appealing to combine your savings into one pot, there are complexities to evaluate.

If you’re struggling with debt, our experienced team at Consolidation Expert may be able to provide you with a debt consolidation loan which could help you to regain control of your finances and simplify your monthly repayments.

Representative 14.8% APR

We are a broker, not a lender.

Representative Example: Borrowing £15,000 over 60 months, repaying £355.28 per month, total repayable £21,316.57.

Total cost of credit £6,316.57.

Interest rate 14.8% (variable).

The lenders on our panel offer loans for 12-360 months, with rates from 4.7% APR to 42.6% APR.

The Representative Example is based on all loans paid out by lenders between 1st Jan 2022 and 31st Dec 2022.

Further reading

Read Is it Possible to Consolidate Short-Term Same Day Loans?
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Read Can I Consolidate Holiday Loans with Other Debts?
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Read How Can I Pay Off My Debts Faster?
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