Why you may want to rethink pension pot consolidation
Gone are the days of a ‘job for life’ as today’s workers are likely to move from job to job, racking up an average 11 employers over the course of their careers.
As such, people are likely to have accrued several pension pots as they approach retirement. Given all the job changes, it’s no wonder an estimated £400m of pension money remains unclaimed.
The benefits of pension pot consolidation have been well documented; more manageable, one big pot means you’re likely to get a bigger/better annuity rate, and of course, lower and fewer fees to contend with.
But before diving into pension pot consolidation, there are some important reasons as to why you may not want to keep all your (nest) eggs in one basket. As with any big financial decision, you should seek advice from a professional, but here are five points to consider:
1) Small pots rule
For those aged 55+ with several pension pots, you may be able to benefit from the small pots rule. Essentially, this allows you to withdraw a cash lump sum from up to three pension pots, each with a maximum of £10,000.
Carolyn Jones, head of pensions product at Fidelity International, says you can withdraw money under the small pension pots rule, irrespective of what other pension holdings you have.
Further, the full amount can be taken as cash but typically, 25% will be tax free while the rest is taxable at your marginal rate.
People saving for their retirement can stash up to £40,000 into their pension pot each year while those aged 55+ who have withdrawn taxable income have a restricted annual allowance known as the Money Purchase Annual Allowance (MPAA). The figure currently stands at £4,000, but under the small pot rules, those aged 55+ withdrawing money from these small pension pots aren’t restricted by the MPAA.
Another point is that the amount doesn’t count towards the pension lifetime allowance – the maximum amount you can save into a pension without triggering an excess tax charge at retirement. It currently stands at £1.03m.
2) Some schemes may have better terms
Some pension pots you hold could have valuable guarantees attached to them which would be lost if you were to transfer out. As an example, some older pension schemes may offer ‘guaranteed annuity rates’ or growth rates.
In other cases, some may allow you to withdraw more than the 25% tax-free lump sum. Jones says: “Make sure you’re aware of all guarantees before making a decision.”
In contrast, some schemes may have restricted options when it comes to retirement. She adds: “If you’re consolidating in order to access your pension pot then you need to ensure the scheme you choose meets your needs.”
Pension charges vary considerably and they’re not always easy to compare as different providers charge for different things. Jones says: “You need to make sure you understand all the charges you may incur with a pension e.g. platform charges, charges to transact or switch, charges for withdrawals etc.”
She adds that many employers can negotiate charge discounts with pension providers, so a workplace pension may be cheaper than non-workplace pensions. In schemes used for auto-enrolment, charges in the default fund are capped.
Jones explains: “Most DC workplace pensions will allow you to transfer other DC pensions in, even if you’re no longer contributing, so you could consider this as an option for consolidation as long as the scheme meets your other needs.”
4) Investment options
If you’re looking to consolidate in order to increase investment options, then again, it’s vital to look at all the paperwork. Jones says: “Many workplace pensions offer a restricted range of investments, whereas SIPPs (self-invested personal pensions) usually have a much wider range of options.”
She adds: “Many people in workplace pensions are in a default investment strategy which is designed and governed for them. If you move to a non-workplace scheme, it’s unlikely there will be a default strategy in place, although some providers offer help in choosing investments.
“You should consider this if you do not want to manage your own investments, or do not have a financial adviser to do this for you.”
5) Pensions dashboard due in 2019
The pensions dashboard idea was first floated in 2016 and it received full government backing at the end of 2017. The pensions dashboard will allow savers to view all their pensions in one place. It is expected to launch in 2019.
Jones says: “While currently the desire for simplification may lead people to consolidation, I wonder how this will change when the pension dashboard is in place. Once people can see all their pensions in one place they will be able to track pensions more easily and look at their pensions holistically without needing to move pensions, or choose to consolidate some while keeping others separate.
“The pensions dashboard will give us the foundation for providing tools to allow people to shape their pension holdings according to their retirement needs.”
She concludes: “Many people have multiple pension pots and these can be difficult to keep track of. Consolidating pensions into a single pension can make planning for retirement easier as people just have to track one pot. But consolidation should be considered carefully to ensure that it is the best thing to do.”