The pros and cons of consolidating lots of small pension pots
Most people’s pensions have traditionally come as part of the benefits package where they worked.
These days the concept of a ‘job for life’ sounds like something from a history book and it is perfectly normal, expected even, to work for many different companies throughout your working life.
Many jobs = many pensions, particularly as auto-enrolment means employers are obliged to set one up for you almost from the moment you start your first day.
The less time you are with a company the fewer the contributions made to your scheme so if you tend to move jobs regularly there is a good chance you will end up with several pension pots with small amounts in each.
When it comes to managing them, the first thing to do is to look at the annual statements you have for each to get a feel for how much is in them in total.
And then, if you can afford it and the total amount is worth it, get some professional advice on the best course of action.
Pensions are more complex than you might think and if you have a mix of different types from different employers they may all have different scheme rules, benefits and/or penalties associated with them if you try to move them or access them early.
One clear rule is that you need to be over the age of 55 to access money from any of your pensions, unless you are terminally ill in which case the company and HM Revenue & Customs may make an exception.
The pros of consolidating lots of small pension pots
- You can make sure all your pension money is in a modern, low-charging scheme that is matched to your specific circumstances and needs. A good independent financial adviser will take care of this for you.
- You get the benefit of economies of scale. Many pension schemes charge a smaller percentage for larger amounts invested, so more of your pension savings are free to grow.
- You can keep track of your pension savings more easily as you would only have one to deal with. And with modern schemes you can normally see what is going on with them online.
The cons of consolidating lots of small pension pots
- Good pension advice costs money, so you need to be comfortable that your total pension savings add up to a reasonable amount for it to be worth getting done professionally. A regulated adviser will take fees into account when making a comparison between schemes, to make sure what they recommend is in your best interest.
- DIY routes exist but if they don’t include advice then you are taking a risk and may not be protected if you make a poor decision.
- You may find that one or more of your pensions are already well invested with lower charges than the normal market rates because your old employer had negotiated this with the provider. Switching schemes like this may not be in your best interests.
There is a real melting pot of changing regulations, working practices, retirement behavior and technological innovations to try and keep track of at the moment.
So, while incoming government innovations such as the pensions dashboard promise easy access to all your pensions in one place, the reality is that an awful lot of pension information is still held on bits of paper by companies whose systems are nowhere near close to being able to plug into the cloud.
Elsewhere, tech startups are pushing the boundaries of how you can interact with your pension much further than the pension dashboard has aimed for.
The fact is that pensions have always been, are still are, one of the best ways of saving for your future – with great tax incentives and employer contributions being in effect free money.
Jamie Smith-Thompson is managing director of Portafina