If you have multiple pension pots, it’s difficult to have a good sense of what you have. You may also be wondering if consolidating your pensions will serve you better.
Many people have multiple career moves, so this is a typical enquiry we receive.
Pensions are a part of your overall finances, so we always want to understand what other resources you may have, in addition to pensions, to fund your future lifestyle.
Consolidation and simplification are a laudable aim, but it must always be for your benefit and not simply to streamline your finances, potentially losing valuable benefits in some of your existing pensions.
To consolidate or not appears to be a simple question, but in reality, can be a complex and time-consuming exercise in obtaining the correct information to determine whether any consolidation should proceed.
Here are 5 solid reasons which will help you decide whether it’s in your best interest to consolidate your pensions or not.
5 reasons FOR consolidating your pension
1.Lower ongoing charges
It’s quite possible that older pension contracts will carry significantly higher ongoing charges than those available today. Definitely worth checking.
2. Crafting a logical overall investment strategy
We often see wildly different investment strategies employed across several different pensions, with no overall strategy geared to when and how these pensions may be used.
3. Annuity purchase
This may form part of your future pension approach and we often see better annuity rates offered for larger pension pots.
4. Death benefits
As pensions are inheritable and potentially the last resource you may use to fund your future lifestyle, ensuring they can be inherited (free of inheritance tax) by future generations (spouse, children, grandchildren etc..) can be a valuable tax planning exercise. Older pensions may simply pay a lump sum to your nominated beneficiary, but this can be highly tax inefficient if it then becomes a taxable (IHT) asset within their estate.
5. Understanding
Having seen so many cases of numerous pension plans scattered across multiple pension providers and accumulated from multiple employments, we say with absolute certainty that, ideally, less is definitely more when it comes to pension plans and understanding what you actually have and will receive.
5 reasons for NOT consolidating your pensions
1. Guaranteed Annuity Rates and Guaranteed Growth rates
Some older pensions contain very valuable guarantees, either guarantees of income at a set age or a guarantee of annual growth to your pension. Subject to your age, health and overall finances, these can be worth retaining.
2. Small pot pension privileges
Defined Contribution (Personal Pension/SIPP) pensions of less than £10,000 can be withdrawn using “small pot exemption”. This can be valuable in not triggering a reduced pension annual allowance and any small pot exemption does not count towards your overall pension lifetime allowance, a small but worthwhile saving.
3. Loss of tax protections
If you’ve successfully applied for pension allowance lifetime protection or you have higher than 25% tax-free cash availability within an older pension, both could be lost if you transfer.
4. Possible exit charges
Surely not! Unfortunately, yes. Certain contracts and pension providers are still applying and getting away exit charges. Even today. So this needs checking.
5. Lack of diversification
Please don’t go ahead with a consolidation exercise and then implement an unnecessarily focussed or dangerously undiversified investment strategy for your new single pension!
The list is not exhaustive, and everyone’s circumstances are different, so there may be other reasons that support your decision as to whether to consolidate your pensions.
If you have a question relating to your pensions, we’d love to help you. Simply complete the form below or give us a call on 01825 76 33 66.
