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The Pension Policy Institute estimates that there are over £9.7 billion of unclaimed pensions in the UK. It is typically an individual’s failure to consolidate and organise their pensions that causes this loss. A pension consolidation is when you combine multiple pension pots into one. Over the course of your career, you will most likely have worked for many employers and collected a few different pensions as a result. Multiple pensions can cause several problems, so consolidating them could be highly beneficial but there are a few things to watch out for.
So, let’s run through some of the benefits of pension consolidation and a few things you might want to know before going ahead with a transfer.
What are the benefits of combining your pension pots?
1. Less pension paperwork
Ease of administration is one of the main advantages of combining all your pensions into one pot. Once you’ve consolidated your pension, you will no longer have to deal with statements from multiple providers making it easier to keep track of your wealth.
2. Pension allowances made easy
With only one pension to deal with, record keeping will become straightforward. This will help if you want to make a large one-off contribution using something like carry-forward. When you do this, you have to look back over previous tax years and determine how much of your annual allowance was used. This can be a nightmare if you have more than one pension.
3. Drawing income in retirement is much easier
If you plan to take income from your pension, consolidation is a bit of a no-brainer. A streamlined approach makes taking income simple and it’s easy to change when you need to. Notably, lots of providers impose a minimum value level on the pot before you can commence drawdown. In addition, many pensions that were established before 2015, may not even facilitate flexible income payments. As such, you might have to consolidate into a SIPP before you retire simply to allow you to access your income the way you want.
4. Easily monitor your pension’s investment performance against your goals
It is more than likely that if you have numerous pension pots, they will be invested in different default funds that have varied levels of risk. Combining these into one pot can ensure that your money is in a single, well diversified strategy that aligns with your goals and needs. Furthermore, understanding how your investments are performing should then be an easy task, as they’ll be reported on in one place and be easily accessible online.
5. Greater choice and investment diversification
It is a common misconception that transferring your pensions to a single provider will reduce the diversity of your investments and impact the safety of your money. In fact, the reverse can often be the case. Many default funds across different providers are invested in similar ways. By consolidating your pensions into a SIPP, your investment choice will typically increase. If your money is managed professionally within the SIPP, the investment management team should be able to access a wider range of sophisticated instruments with the aim of improving risk-adjusted returns.
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What should you watch out for before combining your pensions?
Many pensions can be transferred without a penalty being applied. Some though, can have reasonably high exit charges. Although, these typically reduce as you reach retirement age. As with everything fee related, it’s about weighing up the benefits you receive alongside any additional charges you incur to determine whether it is worthwhile.
The type of pensions you want to consolidate – Defined Contribution and Defined Benefit
Defined Contribution (DC) schemes are based on ‘contributions’ you have made to the scheme. These build up over time to provide an invested pot that can be accessed flexibly. Conversely, Defined Benefit (DB) schemes provide a guaranteed, regular income. Defined Contribution schemes are more typical, modern pensions and are usually easily consolidated. Whilst it is possible to transfer a defined benefit scheme, it’s extremely high risk and is only advised in unique circumstances. You must take advice on a Defined Benefit transfer.
Losing benefits when combining your pensions
Pensions established before 2006 may have unusual benefits attached such as additional amounts of tax-free cash or a guaranteed level of income. It’s important to consider these types of schemes carefully as it may be worth holding onto these pensions due to the additional benefits in place.
How do you consolidate your pensions?
Given all the various pitfalls, consolidating your pension is probably best done with the support of a qualified financial planner. You will need to collate up-to-date statements and policy numbers for all of your schemes. If you are unsure which provider the pension is with, you will need to contact your previous employer and provide them with the dates you worked at the company. They should be able to tell you the scheme details easily. A good adviser will then request letters of authority from you, before providing a recommendation on the consolidation and do most of the heavy lifting.
As you’re probably gathering, the benefits of pension consolidation tend to outweigh the drawbacks. It is really about approaching consolidation in a sophisticated and thoughtful way whilst taking advice to ensure you don’t make any major mistakes.
All authors have considerable industry expertise and specific knowledge on any given topic. All pieces are reviewed by an additional qualified financial specialist to ensure objectivity and accuracy to the best of our ability. All reviewer’s qualifications are from leading industry bodies. Where possible we use primary sources to support our work. These can include white papers, government sources and data, original reports and interviews or articles from other industry experts. We also reference research from other reputable financial planning and investment management firms where appropriate.
Saltus Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority. Information is correct to the best of our understanding as at the date of publication. Nothing within this content is intended as, or can be relied upon, as financial advice. Capital is at risk. You may get back less than you invested. Tax rules may change and the value of tax reliefs depends on your individual circumstances.
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Financial planning can help you reach your goals in life, whether you want to determine when you can retire comfortably, bring organisation to your financial world or pass on your wealth effectively.
Pensions and retirement planning
Deciding when to retire is a challenging decision and can feel like a leap of faith. At Saltus, we gather information on all of your existing assets and then use our technology and expertise to show you exactly how to achieve the retirement you’re after.
Reducing your tax burden
How to structure your wealth and access income should be approached in a sophisticated way. A detailed financial plan may use pensions, ISAs, general investment accounts, offshore bonds and other tax wrappers to ensure you can draw your money in a tax-efficient manner.
Consolidating your wealth
Holding multiple investment accounts and pensions can mean they’re hard to keep track of and administer. We’ll help you overcome this by consolidating your accounts into a single plan so that you can understand your financial position with ease.
Protecting you and your assets
We protect our cars and houses without much thought yet you might be the most valuable asset in your family. Whatever your situation, we can provide advice to ensure you have the right level of insurance in place to keep your finances protected.
Passing on your wealth
Estate planning is more important than just having a Will. We’ll work closely with you to understand how estate planning, which has emotional as well as financial consequences, can impact your overall financial plan.
Significant life events
Significant life events can present great opportunities but also considerable challenges. Whether you are going through a business sale, divorce or are receiving a lump sum, we’ll help build a financial plan to meet your changing lifestyle.