The days of “a job for life” are long gone. Recruit International confirms that under-40s will have an average of 12 jobs in their lifetime.
Since the inception of auto-enrolment, this is likely to mean 12 individual pension schemes to keep track of and 12 schemes to inform of any change in circumstance, such as a change of address.
The Association of British Insurers (ABI) confirms that failing to contact a pension provider when an individual moves house is one of the main ways in which pensions get “lost”.
They report that there are 1.6 million lost pensions in the UK currently, with a total value exceeding £19 billion.
You can use the Pension Tracing Service to track down any lost pensions you have. Once you have found them, you might consider pension consolidation as a great way to simplify your pension provision and to keep track of your plans. But there are cons to consider too.
Keep reading to find out if pension consolidation might be right for you.
The benefits of pension consolidation
You put yourself back in control
The first step in regaining control of your pensions is knowing where they are. Once you have found them all, you can start to compare the schemes.
Which ones have the highest charges or the best performance? Do some offer greater fund choice or have online platforms where you can manage your own investments?
You might find that older plans have higher charges and less flexibility, but they could have additional benefits not offered by your newer schemes. Be sure to think carefully before deciding.
Additional benefits could include guaranteed annuity rates, or death in service payments, and guaranteed minimum pension amounts. You’ll need to check for these with each provider. Be sure to check for any transfer charges too.
The decision of whether to consolidate or not is up to you, just be sure you have all the available information before you decide.
You could end up with a larger overall pot
Consolidating your pensions will leave you with one large pot. A larger pot will multiply the effects of compound growth and could also see you save money on charges – by transferring out of the schemes with the highest ones.
You might also consolidate into the plan showing the best investment performance, further helping to grow your fund.
There are tax implications to consider though, more on which later.
Keeping track of your pensions will be much easier
The decision to consolidate will largely be a financial one, but it can be one of convenience too.
Having all your plans together in one place means keeping track of one overall value and filing just one set of paperwork and contact details.
This makes keeping track of your fund much easier and finding out the overall value of your pensions will only ever be one phone call away.
The tax implications of pension consolidation
The main potential drawback of consolidation is the tax treatment of larger pots. Taking a large pot as a lump sum, for example, could push you into a higher tax bracket.
Tax rules for uncrystallised funds pension lump sums (UFPLS) mean that you could get emergency taxed on the payment you receive. This is because lump sums taken in this way are taxed on a “month 1” basis. HMRC assume the amount you have received is the first in a series of regular monthly payments, effectively cutting your tax allowance by 11/12ths.
An overpayment can be claimed back but this can take time. You would need to bear this in mind if you were releasing the funds to make a time-sensitive purchase.
You might also find that keeping small pots – those under £10,000 – is more tax-efficient. This is because you can take up to three small pots as a one-off lump sum (25% of which will be tax-free) without the amount counting towards your Lifetime Allowance.
This could be especially important in light of the government’s recent LTA freeze that is expected to raise almost £1 billion in charges over the next five years.
Get in touch
If you are thinking about consolidating your smaller pensions into one pot, there are pros and cons that you’ll need to consider first. There is no one right decision and the best course of action will be different for everyone.
Thankfully, Fingerprint are here to help. If you would like to discuss consolidating your plans or any other aspect of your retirement planning, get in touch by emailing hello@fingerprintfp.co.uk or call 03452 100 100.
Please note
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up, 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. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.
