These days, many people work for a series of different employers during their working life and accumulate multiple pension plans.
Having a variety of small pensions with different providers can make it difficult to keep track of retirement savings and measure how funds are performing. It can also be a tough task to calculate what benefits they could provide.
If you have several different pension arrangements, one way to make things easier could be to consolidate your pensions into a single plan. To help you understand whether you could benefit from consolidating your pensions into a single arrangement, here are some pros and cons to consider.
Pros of combining your pensions
It will be easier to keep track of your pension savings
A single pot is far easier to administer. Instead of having to keep track of paperwork, performance, and logins for numerous schemes you'll have one provider, one annual statement, and clarity of performance and likely benefits you'll receive in retirement.
A single annual statement detailing your full pension fund will make it far easier to know if you're on course to achieve the retirement income you desire.
Additionally, when you come to draw income from your pension pot, dealing with a single provider will make it a significantly simpler process.
You could reduce charges and increase investment options
Multiple pension plans will likely deliver differing investment performance. Fees may also vary.
Some old-style pension schemes carry particularly heavy management fees and ongoing administration costs, so it is important to check exactly how much you are paying for your pension.
Consolidating all your pensions into a single scheme, with lower charges, more investment choice, and the potential for increased fund performance could see your pension pot grow.
Since pensions are a long-term investment, even a small decrease in overall fees could amount to a significant increase in your pension pot at retirement.
You could gain more control
Many modern pension schemes tend to provide online portals, giving client’s real-time access to investments.
Access to an online portal will allow you to track the performance of your funds, provide up-to-date valuations, and options for fund switching.
Greater flexibility
With a single pension plan you could benefit from increased flexibility on how and where you take the proceeds from your pension. This is particularly important if you are living or working abroad, or if you are planning to retire in a country or jurisdiction outside the UK.
Cons of combining your pensions
You could face multiple transfer charges
Pension schemes, especially older ones, could have exit penalties attached.
If you have multiple older plans, it's vital to ensure the combined cost of these charges doesn’t outweigh the potential benefits of consolidation.
You could miss out on valuable scheme benefits
If you are part of a final salary (defined benefit) scheme you may not receive the same benefits if you leave. For example, your final salary scheme may provide protected tax-free cash (TFC) or a protected lower pension age that you could lose, if you were to transfer out of the scheme.
Likewise, if you have a pension with guaranteed benefits these may no longer be available if you transfer out of the scheme.
Should you leave a final salary scheme, you will be taking on the investment risk yourself, instead of the final salary scheme trustees. And your existing scheme may guarantee a certain level of annuity payments, which may be better than you could achieve in the open market.
You’ll need to weigh the cost of these benefits against the comparative gains of transferring.
There are strict rules around final salary pension transfers, so you'll need to seek expert advice. If you have one of these pension schemes, get in touch and we'll help you understand your options.
Transferring multiple pensions overseas
If you are planning to transfer multiple pensions overseas, you could transfer them into a SIPP (self-invested personal pension) or to a QROPS (qualifying recognised overseas pension scheme).
You could also opt for an international SIPP. This allows funds to be held in the major foreign currencies, which can be particularly beneficial for expats who expect to remain living overseas in retirement.
Similarly, QROPS also offer the benefit of holding your pension in multiple currencies.
Being able to hold your pension fund in the currency of your choice helps to ensure that you know what amount of income you can expect to receive, instead of being open to currency fluctuations.
If you have a large pension, on transfer to a QROPS a Lifetime Allowance (LTA) test will take place. Thereafter, as long as the funds remain outside the UK pension scheme, the funds will not be subject to LTA.
LTA tax is charged on pensions where total funds exceed £1,073,100. Tax is charged at 55% on funds above the LTA that are taken as lump sum withdrawals or 25% on funds used for an income purpose (drawdown/annuity) as well as any income tax due on any income withdrawals/annuity payments.
QROPS offer a wide range of investment choice to suit your circumstances, your appetite for risk, and your time horizon.
On your death, as with most UK pensions, the funds in a QROPS will not form part of your estate, so your beneficiaries will not pay Inheritance Tax.
Once your pension benefits transfer to a QROPS they are no longer under UK regulation. Assuming you are not a UK resident, this means that your pensions will be paid free of any UK tax, although they will be subject to tax in your country of residence.
Think pension consolidation is right for you?
Whether you live in the UK or elsewhere in the world, there are numerous advantages in combining multiple pensions into one easy-to-manage scheme. However, because transferring out of certain pension schemes can mean you lose out on some valuable benefits, it’s important to get professional advice from an expert.
While it is important to understand the benefits and drawbacks of combining your pension savings, it's far more important to discuss how they fit in with your plans.
We are happy to chat about your situation and answer any questions you may have about transferring your pension.
As well as assessing your retirement funds and performance, your adviser will also discuss your current financial circumstances, your long-term plans and objectives, and your attitude to investment risk.
Get in touch
If you would like to discuss consolidating your pensions or any other aspect of your retirement planning, get in touch. Email enquiries@alexanderpeter.com or call us on +44 1689 493455.
Please note: The content of this newsletter is offered only for general informational and educational purposes. It is not offered as and does not constitute financial advice.
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. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.
Workplace pensions are regulated by The Pensions Regulator.
