What you need to know before consolidating pensions
Many people may be looking to give their finances a New Year spruce up by consolidating their pensions.
With the average person having 11 different jobs over the course of their lifetime they are likely to accumulate several pension plans which can be difficult to keep track of and some may be better value than others.
However, while it may be sensible to consolidate your pensions, mutual insurer Royal London highlights the key issues that need to be considered before taking the plunge.
Benefits of consolidation
- Easier to keep track: It can be easy to lose track of multiple pensions and so consolidating them into one place can make sense. It will also give you a clearer picture of your overall pension wealth. You will also have less paperwork to deal with.
- Lower fees: Consolidating your plans is a good opportunity to check what charges you are paying and make sure you aren’t paying more than you should.
- More suitable investments: If you have pensions which offer limited investment options or don’t allow you to invest in a way that reflects your values then it might make sense to switch to somewhere with options that suit your individual circumstances.
- You could have more options at retirement: You might find your old pension doesn’t offer you the retirement income options you want so it may make sense to consolidate with a provider that offers what you need. Similarly, if you wanted to purchase an annuity with your pension then you could get a better retirement income with one larger plan rather than several smaller ones.
Things you need to be aware of before consolidating
- You may incur exit penalties: While modern pension plans can usually be merged without charge some older ones may have exit charges attached. These can be significant depending on the size of your fund.
- You could lose valuable benefits: Some older style pensions entitle you to take more than the standard 25% in tax-free cash. Others might allow you to take your pension earlier than the usual age of 55, or come with a guaranteed annuity rate (GAR). If your pension has a GAR, it means your provider will guarantee to pay you a minimum level of income for the rest of your life, in return for your retirement savings. Annuity rates have been low for some time and so having a GAR may provide a significant boost to your retirement income.
- There are advantages to having small pensions: You can cash in small pensions of less than £10,000 (known as trivial pots) and still continue to pay into another pension up to the annual allowance of £40,000. Usually when you start to take income from a pension, the amount you can continue to contribute to a pension drops to just £4,000 a year. In addition to having an annual allowance, pension savers also have a lifetime allowance (currently £1,073,100) and taking money from your pension will usually trigger a check on whether you have reached this allowance. If you have then you may have a tax bill. However, you can take up to three pensions of under £10,000 without it counting towards your lifetime allowance.
Helen Morrissey, pension specialist at Royal London, said:
“Many people’s New Year’s resolution will be to sort out their finances and consolidating pensions can save you money, time and give you more options at retirement. However, there are potential pitfalls that could cost you dearly if you aren’t aware of them. There is no one size fits all so taking financial advice will help you navigate the pitfalls giving you the best retirement outcome for your individual circumstances.”
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Royal London Press Office
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About Royal London:
Royal London is the largest mutual life insurance, pensions and investment company in the UK, with assets under management of £139 billion, 8.6 million policies in force and 4,348 employees. Figures quoted are as at 30 June 2020.