How many is too many? 8 points to consider before consolidating your pensions

Published on April 12, 2022 by Andrew
A herd of tightly packed sheep

Figures published recently in Pensions Age suggest that 66% of UK workers have more than one pension pot.

While nearly a third (30%) have two pots, 16% of workers aged 40 and over have four pension pots or more. Worryingly, 6% of respondents had no idea how many pots they had.

If you have more than one pension – or you think you have another pot somewhere that has been lost – you might consider finding all your plans and then consolidating them into one single pension.

This can be a great idea for some, but there are several important factors to consider.

Here are eight of them.

1. Do you know where all your pensions are?

Before considering consolidation, you’ll need a firm grasp on the pensions you hold.

Dig out your pension paperwork and contact former employers and providers. If you’ve lost contact with a scheme, use the government’s pension tracing service to find up-to-date contact details.

2. Having only one set of paperwork could relieve pension stress

After the stress and hassle of finding your lost pension paperwork, the benefits of simplifying your pension admin will be clear.

If you opt to consolidate, you could end up with just one scheme provider to deal with and one set of paperwork. You’ll never lose track of your pensions again.

This could make a huge difference to the amount of stress you feel in the approach to retirement.

Juggling pension options, gathering values, and making important decisions that will affect the rest of your life can be difficult, so be sure to contact us and remember that we’re here to help.

3. A single fund can make pension calculations easier

As well as reducing admin stress, a single pot makes pension calculations easier too.

You’ll be able to see, at a glance, the total pension funds you hold. This could make choosing the right option easier, possibly by simplifying the tax implications. You also won’t be weighing up multiple quotes from different providers.

You’ll only have one pension income to worry about too. Budgeting can be tough, but with only one investment and one set of withdrawals to manage, you’ll have more time to enjoy your retirement.

4. You might pay lower charges or see improved investment performance

Once you have all your paperwork together, find out which schemes have the highest charges and the best investment performance.

Some older plans might have higher charges and fewer fund choices. Newer plans, meanwhile, might allow you greater input into where and how your money is invested, as well as online portals to track your investments more easily.

Carefully weighing up charges and performance could allow you to transfer all your pensions into the scheme that has the potential for the greatest returns at the lowest cost. You’ll need to be aware, though, that past performance is no guarantee of future success.

5. A single large pot could lead to an increased tax liability

Taking a large pension as a lump sum could be a great option if you have one-off expenses planned, like world travel or house renovations. But taking a large pension in one go could have tax implications.

Any income you take beyond your 25% tax-free cash entitlement is subject to Income Tax. A large payment could push you into a higher tax bracket, meaning you could pay 40% or 45% tax on a portion of your pension income.

Think about your retirement plans and how much they will cost, and then speak to us about the most tax-efficient way to access your benefits.

6. Think about small pot rules

You can usually take up to three “small pot” pensions – with individual values below £10,000 – as one-off lump sums.

You’ll receive 25% of each pot as tax-free cash with the rest taxed as income. However, unlike some other flexible options, a small pot payment doesn’t trigger the Money Purchase Annual Allowance.

This means you can take small pots as lump sums and still receive tax relief on future contributions up to your full Annual Allowance. Combining smaller pots means this option is lost.

7. Consider the potential impact of transfer charges

You will usually have to pay a charge to transfer your plan to another provider. Be sure to weigh this charge against the potential reward of lower plan fees and better performance.

You might find that the short-term loss of a transfer fee is worth the long-term gain.

8. Be wary of transferring a defined benefit (DB) pension

Defined benefit (DB) pensions are thought of as the pension “gold standard”, due to the potential for increased annual income – compared to a defined contribution (DC) annuity – and additional benefits like inflation protection and the available options on death.

All of these benefits would be lost through a transfer into a DC scheme, so a DB transfer is rarely your best option. Speak to us if you’re considering it.

Get in touch

There are pros and cons to pension consolidation. It is an important decision that could have long-term consequences for your retirement and won’t be the right option for everyone.

If you are considering it, get in touch to find out how our team of experts can help you decide. Email or call 0800 0787 182.

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.

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