Financial Fundamentals: Is pension consolidation right for you?

Our Financial Fundamentals series is here to guide you through some of the most common concerns in personal financial planning. Each month, we help you navigate a different topic to help you make the best decisions for your financial future.  This month: is pension consolidation right for you?

What is pension consolidation?

The job for life is long gone in the UK, with each of us holding an average of six jobs over the course of our working lives. That trend is accelerating, with workers currently aged 18 – 34 expected to rack up an average of 12.5 jobs during their career.

With each new job comes – typically – a new pension. While it’s always wise to enroll in any employer pension available, the proliferation of separate accounts, potentially combined with personal pension savings schemes, can have its downsides. Scattered pension accounts can make it difficult to see a holistic picture of your projected retirement income, and the perceived admin involved in tracking multiple pension pots may deter more proactive management of your pension pot.

Pension consolidation can offer tempting solutions to these problems. Pension consolidation simply means pulling two or more pensions together into the same account, either by adding funds from one account into another you already hold, or by transferring the combined funds to a new pension account.

Some providers offer ready made accounts suitable for holding consolidated pension funds, while if you prefer a more hands on approach to managing your savings, you may opt to open a Self-Invested Personal Pension (SIPP). Whichever you choose, it’s vital you take personal professional advice and ensure your provider of choice is registered with the Financial Conduct Authority (FCA), as scammers can all too often present ‘too good to be true’ schemes which do nothing but rob savers of their hard-earned retirement funds.

Why should I consider pension consolidation?

People who choose pension consolidation generally do so for three reasons: ease of tracking, lower charges and better choice.  In addition, doing so may offer more flexibility when you retire as a number of older pensions often don’t allow flexible drawdown or income as when they were set up they were restricted to buying an annuity.

Consolidating multiple pensions into one account should make it easier to see what funds you have invested, where they are invested and what level of income you are projected to receive in retirement. This can be especially useful if you’ve set defined goals for your retirement income and want to make sure your savings are on track, or if you’re unsure of when you’d like to retire and want to assess your options. Receiving one single annual statement makes tracking your consolidated pension a much easier proposition.

The final reason behind many decisions to consolidate pensions is to take advantage of a better and wider choice of pension products than may have been available when you first began saving. The more closely tailored your financial products and services are to your own financial priorities and circumstances, the more likely they are to help you achieve your goals. You may find, for example, that you want to take closer control over the investment decisions made for your portfolio, making a SIPP ideal.  There are more choice of funds and different types of assets you are able to invest in.

What are the downsides of pension consolidation?

Pension consolidation is not without risk and should not be entered into without receiving tailored advice from a professional.

Whilst the idea of having all your pension funds in one place will likely make planning and administration easier, there can be drawbacks that must be considered and it is therefore imperative that no decisions are made without having a full understanding of the impact of your actions. Some older pensions may offer additional benefits such as a higher rate than standard on tax-free cash withdrawals, guarantees in terms of growth rates or income in retirement. In addition, in some circumstances there can be significant penalties on transferring a pension and you could even miss out on investment gains if the stock market rises significantly while savings are being transferred.   

You may also be impacted by the government legislation due to commence in April 2028 raising the age at which you can first access your pension (normal minimum pension age) from 55 to 57.  This is in line with the rise in retirement age to 67 and depending on a number of factors, including when you took out a particular pension policy, your provider and your age, will determine whether or not you should consolidate some or all of your pensions.

How do I decide if pension consolidation is right for me?

Free resources are available to help you consider your options, such as the Pensions Advisory Service and, if you’re aged 50 or over, Pension Wise, it’s strongly recommended that you speak to an independent financial adviser such as McCrea Financial Services to find out if pension consolidation is right for you. We can make recommendations based on the risks and opportunities you face in deciding whether or not to consolidate, manage the switching process if you do decide to go ahead and even help you track down any pension accounts you may have lost track of and check whether or not you need to think about other investments if you are close to the Lifetime Allowance for your pension funds.

As a completely independent firm, we’re not tied to any providers or products, meaning we focus on finding the solution that’s right for you. We take the time to understand your circumstances and priorities, and as these clients found to their delight, can identify tailored opportunities you won’t hear about from generic sources of advice.

We offer a free, no-obligation consultation, so why not get in touch to start a discussion about whether pension consolidation would work for you.