You can make the task of retirement planning much simpler by combining your pensions. It’s not that difficult to do, especially if you enlist the help of the team here at Moneyfarm. Please read on to find out more regarding how to combine pensions.
| 🤔 Can I combine all my pensions into one? | Yes, but also depends on the type of pension |
| ❓ What types of pension can be combined | Defined Contribution (DC) pensions, Defined Benefit (DB) pensions, Personal pensions, Self-Invested Personal Pensions (SIPPs), Workplace pensions, and Stakeholder pensions |
| ➕ Can I combine a defined benefit pension with a defined contribution pension? | Yes, you can combine the two types of pensions |
| 💸 Can I transfer a workplace pension to a personal pension? | Yes, but penalties may occur |
It’s a comfort to know that if you have made the appropriate NI contributions, you will be entitled to the state pension. But on its own, it is unlikely to be enough to allow you to enjoy a comfortable retirement. That is why many people decide to take out an additional pension, often in addition to any workplace pension or private pension they may have.
Why you should combine pensions from previous employers
If you are asking yourself, “should I combine my pensions,” the answer is yes, you should. There are two reasons why this makes good sense.
- It’s much easier to monitor the returns from one, combined pension than several different ones.
- You will have one simple fee instead of several, and if you choose Moneyfarm as your financial advisor, that fee is likely to be less.
A step-by-step guide on how to combine pensions
As you journey through your working life, provided you are employed and earn at least £10K per annum, you are likely to have at least one workplace pension. Each time you change employers, you will be automatically enrolled in your new employer’s scheme, so it’s quite common to accumulate a number of workplace pensions, one of which could be a salary sacrifice pension or salary exchange scheme.
This step-by-step guide tells you how to combine pensions. It also applies to SIPPs if you happen to invest in a SIPP as a self-employed pension.
- Track down all types of pensions you have. This applies to both defined contribution pension schemes, defined benefit pensions, and SIPPs
- Make a note of the policy numbers.
- Contact the pension provider(s) by phone or email.
- Pass the pension details over to the pension provider(s). If you have problems with either identifying a pension or locating the details, chat with the employer concerned.
- The trustees responsible for running a defined benefit scheme will give you a final cash equivalent transfer value. Once you have that, the money can then be moved on. Please be aware that this process can take up to 9 months.
- Contact your new or current pension provider online or over the phone and let them know you want to transfer another pension to your existing or new plan. Provide them with any details they request, including an estimation as to how much the pension or pensions could be worth.
Essentially that’s all you need to do as far as how to combine pensions is concerned. It’s then down to your selected pension provider to do the necessary. If you need any help or financial advice with this process, the team here at Moneyfarm will be pleased to assist.
The advantages of combining pensions from past employers
Before asking yourself, how do I consolidate my pensions, you need to be satisfied that it would be a worthwhile exercise. We’ve already discussed the advantages of making management easier and reducing fees or charges, but there is another advantage too. You can end up with a broader range of investment options that could better suit your preferences and goals.
The risks and challenges of consolidating your pensions
One of the biggest challenges regarding how to merge pensions is fully understanding the benefits and possible drawbacks of any existing workplace or private pension.
A final salary pension, also known as a defined benefit (DB) pension, is much more tricky than a defined contribution pension when it comes to how to combine all pensions. Whereas a defined contribution (DC) pension has a pension pot, DB pension plans don’t. They use something called the commutation factor.
Calculating how much of a 25% tax-free lump sum you are due from a final salary pension is quite complex and is best left to a pension financial adviser. A final salary pension is a bit like when you buy an annuity – only you don’t have to buy it. You will automatically receive a guaranteed income with guaranteed annuity rates.
The benefits of a DB pension scheme can be difficult to fathom and match, and it’s why many people leave them well alone and do not merge them. That doesn’t mean to say that it can’t be done, but you first should seek expert advice – in fact, if the benefits are valued at £30,000 or more, seeking financial advice is mandatory.
Pension consolidation options
Now you know how to consolidate pension pots and how to merge your pensions (all types), there is one exception to the rule – certain public sectors direct benefit schemes, such as those for the armed forces, the civil service, the NHS, the police, and teachers. Since 2015, transfers out of these schemes are not permitted.
Pension consolidation and tax
The tax implications of pension merging are the same, no matter which pension consolidation option you choose. Your annual allowance is the same (currently £40,000, soon rising to £60,000 per annum); it is the total shared out amongst all pensions.
Similarly, the 25% tax-free lump sum is shared, and the pension lifetime allowance, which at present, is due to be abolished from the 6th of April 2024.
Closing thoughts
Asking yourself, how much do I need for retirement, is something that everyone should do, and the earlier in life, the better. Your pension savings will determine the level of financial comfort you will be able to enjoy once you’ve retired.
Pension consolidation can help you to achieve that by maximising your personal pension savings after transferring your pension pots into one easily manageable, low-fee scheme.
Don’t forget that pension scams are rife. Even though you now know how to combine pensions, you can still get caught out. So, before you talk to a financial adviser or give anyone the go-ahead, make sure they are approved and registered by the Financial Conduct Authority and any pension scheme you choose, or that is chosen for you is covered by the Financial Services Compensation Scheme (FSCS).
FAQ
Will I lose any benefits if I combine my pensions?
If you combine pensions, you may lose some valuable benefits, such as guaranteed annuity rates. Please check the terms and conditions of your pension schemes before attempting to combine pensions and make sure the advantages of a pension combination outweigh the disadvantages.
What are the benefits of combining pensions?
Some benefits of combining pensions include tracking your retirement savings, simplifying your retirement planning, and easily managing your money. It can also help you to potentially reduce management fees and improve your investment returns by having a larger pool of money in more diverse portfolios.
Is combining pensions right for me?
A pension combination may not always be the right option for everyone, some people may benefit from the exercise but not everyone. You should always seek advice from a financial advisor to determine whether combining your pensions is the best option for your individual circumstances.
