George Square Financial Management shares the benefits and potential drawbacks of pension consolidation and provides an overview of the “pot for life” pension reforms announced in the Autumn Statement 2023.
Most people will work in several jobs throughout their lifetime, which, coupled with moving house a number of times, can make it difficult to keep track of where your pensions are and how much you have saved.
If you are nearing retirement and thinking about consolidating some of the pensions you’ve built up over the years, we always recommend speaking to a qualified independent financial adviser to ensure it’s the right option for you. In the guide below, we’ve outlined some of the key advantages and disadvantages worth considering when making the decision.
What is pension consolidation?
Before we dive into some of the reasons why you might want to consolidate your pensions, it’s worth just confirming what is meant by pension consolidation and how it comes about.
The Lost Pensions Survey recently revealed that the average person will have 11 different jobs in their lifetime and move house eight times. It is therefore unsurprising that many people lose track of the various pensions they have been paying into over the years. Having numerous pensions spread out across different pots can make it difficult to see the full scale of your retirement savings and how your investments are performing.
If you have accumulated a number of pensions from different employers, bringing them together into one single pot may be an appropriate option for you. This is known as pension consolidation. Merging all your different pension pots can help give you a clearer picture of your financial position. This enables you to make more informed decisions about your retirement savings.
What are the benefits of consolidating my pensions?
Pension consolidation can make it easier to keep track of your savings; often people feel it simplifies their financial affairs. Having one pot allows you to know with certainty exactly how much you have saved for the future. This in turn makes it easier to make adjustments if you find you are under-saving.
Having one pot also allows you to see exactly where you are investing your money. This can help you to better manage the level of risk within your investments by making it easier to spot overexposure to a particular market.
Some pensions may also have limited opportunities for where you can invest your savings. Consolidating your pension may help to give you a broader selection of investment options.
In addition, you may be able to save money on your pension scheme charges by transferring your savings to a lower cost scheme. This is particularly true when transferring out of more traditional workplace pensions, many of which do not have competitive charges in comparison with today’s standards.
In terms of pension freedoms, older pensions may not have the same flexibility that newer schemes have. It may be that a former scheme does not give you the full range of options for accessing your pension money from age 55. Consolidating, therefore, gives you more options for how and when you can access your pension.
Are there any disadvantages to be aware of?
While a pension consolidation helps to keep things simple and has a number of advantages, there are still some things to keep in mind when deciding if it is the right option for you. For example, in some cases, you may lose the existing benefits of a particular pension scheme if you transfer away from it, such as life insurance or critical illness cover, which could be costly to replace.
If any of your providers charge exit fees, it is also important to weigh up the trade-off between these and the amount you will save on annual fees by switching.
“Pot for life” pension reforms: the issue of small pots
In this year’s Autumn Statement, as well as confirming that the new state pension will increase by 8.5% from April 2024 under the triple lock, Chancellor Jeremy Hunt announced that the government will consult on “pot for life” pensions reforms. This includes giving pension savers a “legal right to require a new employer to pay pension contributions into their existing pension” and will give employees the ability to select their own pension provider.
At present, employers are obliged to automatically enrol eligible new staff into a pension scheme chosen by the company, but this has resulted in millions of smaller pots building up in the system when workers move jobs and switch to a new employer’s scheme.
While an interesting concept, there are pros and cons to the “pot for life” scheme that must be carefully considered, particularly with regards to how it would work with the auto enrolment regulations currently in force. The government has launched a ‘call for evidence’ on this new pension model.
Is consolidating the right choice for me?
Ultimately, seeking professional financial advice can help you to determine if the benefits of consolidating outweigh the potential drawbacks. At George Square Financial Management, we are committed to providing ethical and professional pensions advice.
If you are unsure whether or not to consolidate your pensions, or would like to learn more about the options available to you, please get in touch.