Why pension consolidation makes sense

By George Gardner, Investment Advisor

For many of us, retirement planning can, understandably, be an afterthought; if you’re still facing decades of work before being ready to hang up the boots, it’s easy to prioritise your nearer-term financial goals rather than sitting down and planning for life after work.

This has only become more pressing lately, after a couple of years of high inflation chipping away at cash savings in real terms, and the subsequent cost of living making it more and more difficult to save. It is, however, important to try and have a clear understanding of your retirement savings throughout your career. On an almost daily basis, clients tell me that they’re unsure if they have enough saved up in their pensions to retire when they want to, oftentime because they don’t have a clear picture of what they have, and where they have it.

It’s easy to lose track of pots

The average person in the UK will have over 10 different jobs throughout their career – and some newer researchers indicate that a job-hopping trend is becoming all the more prevalent. With different employers often using different workplace pension providers, or offering different pension scheme types altogether, oftentime people will retire having a number of smaller pots spread across several providers.

This invariably means some pensions are left dormant, forgotten – or worse, lost altogether. It might sound odd to some, but when you consider that the average person in the UK will change address eight times in their life, oftentime without notifying their pension provider, it’s easily done. Similarly, the pension management industry is as ruthless as any, and pension providers are regularly bought, sold or merged with others, meaning that your pension might’ve moved hands from one provider to another, without you even knowing. These factors mean that losing track of pensions is easily done. In fact, as many as one in five say that they’ve lost track of at least one pension.

One of the main ways of tackling this problem is through consolidation. This involves identifying your various pensions and bringing them all together in one, manageable pot. So, first, you need to track down your dormant pension schemes.

Fortunately, with our new Find, Check & Transfer service, we make tracking down your lost pots easier than ever before. We’ll do all the work for you – from searching for each lost pot to consolidating them all in one place. Provided you can work out who you worked for, and when you worked for them, we’ll be able to trace down your legacy pensions, even if they’ve changed hands. You can find more about our new Find, Check & Transfer service on our dedicated page here, or simply book an appointment with an adviser to learn more.

Pension tracing and consolidation is also now on the new government’s priority list. On Wednesday, 17th of July, King Charles delivered his King’s speech to announce a series of bills proposed by the new Labour government, one of which was a new ‘Pension Schemes’ Bill; signifying the new government’s commitment to improving pension legislation, with a particularly keen focus on ‘micro’ pension consolidation; an issue impacting an estimated 2.8mn pots in the UK.

How can I consolidate?

Let’s first look at how you can consolidate your pensions, before thinking about why you might want to. The good news here is that pension transfers have become increasingly easy and efficient. Most providers – including Moneyfarm – can manage your pension transfer from start to finish, with the process taking between a few weeks to a few months to complete. Many providers now use online tools for pension transferral, meaning you might not even need to sign any forms. If you know where your pensions are, great – it’s just a matter of completing a pension transfer request via our platform. If you think you’ve lost track of any, then our new Find, Check & Transfer tool can help you.

So why should I think about consolidating?

Pension consolidation is something we’re asked about quite a lot, so I thought I’d share a few of the key benefits of pension consolidation.

Regaining control

When your pensions are spread out between various pots, they’re managed separately and you can easily lose track, making it difficult to stay on top of charges, performance and other key investment variables. Over the years, a number of regime changes have provided individuals with greater investment freedoms than ever before; no longer are you required to buy an annuity, or sit in a large default pension fund. If you can consolidate your pensions together, you can more easily keep on top of how much you’ve got, how much you’re paying for it, and how it’s being invested.

Costs and charges

Charges are a key item to consider. Multiple pots with multiple providers means you are paying multiple charges. The majority of wealth managers will charge you management fees which are based on the value of the assets held – typically decreasing the fees in % terms as the value invested increases. This means that if you have several smaller pots, each with a different provider, you’re likely paying more in fees than if you had one larger pot with one provider. In short, if you’re able to consolidate your pensions, you’d typically expect to benefit from the economies of scale (with respect to the fees paid), if you consolidate them into one larger pot.

Keep it simple

Another key consideration is simplicity. It can be time-consuming and arduous to keep track of various different investment pots, particularly when it comes to planning your retirement in more detail down the line. When it comes to figuring out how much income you want to take and over what time period, having your cash together in one place will simplify the whole process. Whether you oversee your own finances, or work with an adviser, managing fewer accounts saves you time and effort.

Reduce your administration

Nobody likes having to deal with the administrative burden of life, but we find it inevitable, particularly when it comes to our finances. Dealing with fewer providers can be a huge time saver when it comes to taking income in retirement. When you start drawing down on your pensions, you’ll likely need to complete a handful of forms. If you have several pensions, you will find yourself redoing very similar versions of those forms several times. Beyond that, you’ll also accrue a fair bit of documentation and paperwork as a result, which you may need to keep on file; if nothing else, having fewer pensions means you can avoid duplicating the unavoidable work involved in managing your retirement.

As with any investment decision, there are pros and cons which you should consider before consolidating. Certain pros or cons may be more or less applicable to you, depending on the scheme types, and your other financial arrangements. In general, however, pension consolidation is seen to be a great way to simplify retirement planning and maximise your wealth. 

As always, if you wish to discuss your retirement options please reach out to our investment consultant team on 0800 433 4574, or drop us an email at support@moneyfarm.com.

George Gardner, Investment Consultant at Moneyfarm: George is passionate about helping our clients to make informed decisions. He takes a keen interest in all-things relating to personal finance, current affairs, and financial markets globally. Since joining Moneyfarm, he has completed his Investment Advice Diploma with the Chartered Institute for Securities and Investments (CISI), specialising on financial planning and advice.