Over the last few decades, the traditional notion of a lifelong career with one company has largely given way to a more fluid model, where moving from one employer to another is the norm. As a result, many high earners have multiple pension accounts in existence as they’ve been automatically enrolled in a new pension scheme every time they’ve started a new job. If you have several pension accounts in place at present, it could be worth considering a pension consolidation.
Not only can a consolidation give you more control over your money, but it can also make planning for retirement considerably easier.
The importance of pensions
Before we look at the advantages of consolidating pensions, it’s worth touching on the key role that pensions can play in financial planning and wealth management.
In the UK, investing within a pension is one of the most effective ways to build long-term wealth. When you make a contribution to a pension, you typically receive tax relief, subject to maximum limits. Higher-rate taxpayers can claim an extra 20% tax relief, while additional-rate taxpayers can claim an extra 25%, on top of the basic 20% relief automatically applied. Meanwhile, your pension investments generate capital gains and investment income free from tax. So, you can grow your wealth free of any tax-drag.
Given the power of pensions, it’s important to have a proactive approach in place. This is particularly true for women with research showing that by age 60, women’s pension pots are on average 43% smaller than men’s, highlighting the gender pension gap driven by pay disparities, career breaks and part-time work.
Four advantages of pension consolidation
As for the advantages of consolidating pension accounts, there are several, here are just four to consider:
- Bringing together your different accounts makes it much easier to manage your money. When your retirement savings are all in one place, monitoring your investments takes less time. It’s also easier to work out if you’re on track to meet your retirement goals.
- A centralised view of your pension savings allows for a clear understanding of your asset allocation.If you spread your retirement savings across multiple providers, tracking your asset mix and understanding your risk can become more difficult. Asset allocation is a major driver of investment returns over time, so it’s important to get this right.
- A pension consolidation can also give you more investment flexibility. Old plans may have limited investment options and a transfer to a more flexible provider could give you a wider range of investment choices including access to alternative investments such as commercial property. If your current provider offers limited investment choices or poor performance, consolidating your pensions could be a sensible option.
- Combining your pensions could give you the opportunity to lower your costs. Today, many pension providers have tiered fee structures where annual charges are lower for higher account balances. While workplace pensions are often inexpensive, it never hurts to review fees across your pensions to see if a consolidation could be beneficial.
When not to consolidate your pensions
It’s worth pointing out that while a pension consolidation can have many benefits, it’s not always the right move. For example, if you are a member of a defined benefit pension scheme, it may not be wise to combine your pensions. If you transfer out of this type of pension, you’ll be giving up guaranteed benefits and potentially taking on greater risks.
Similarly, if you have a pension that comes with valuable benefits such as guaranteed annuity rates, it may not be sensible to consolidate. If you are not sure whether you should combine your pensions, it’s a good idea to get advice from a financial adviser.
How to consolidate pension accounts
When it comes to the actual process of consolidating your pensions, there are a number of ways to go about it. One approach is to select one of your pension accounts and transfer the other pensions to this account. This could make sense if you’re happy with how one provider delivers their services.
Alternatively, you could bring together all your pensions into a Self-Invested Personal Pension (SIPP). A SIPP is a government-approved personal pension scheme that gives you greater control and flexibility over how you invest your pension savings. Please note that from 6th April 2028, the minimum pension access age will rise from 55 to 57 unless your plan has a protected pension age. If you are not sure about the best approach, it could be worth consulting an expert.
How Bowmore can help with pension consolidation
There are several advantages of consolidating pensions, however it’s not the right move for everyone. As is often the case when it comes to money, there are a number of variables to consider and it’s important to understand the benefits and risks involved.
Often, the most sensible thing to do before combining your pension accounts is to speak to a pensions expert. They will be able to provide tailored advice that is specific to your individual circumstances and help you make an informed decision.
At Bowmore, we have decades of experience in this area of financial planning. We understand the intricacies of pensions and we can help you build a well-diversified retirement portfolio, that is working to meet your goals.
To find out more about how we can help you with pension planning, get in touch.
Regulatory Information
- Bowmore Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority.
- The value of your investments can go down as well as up, so you could get back less than you invested.
- Bowmore Financial Planning Ltd is not regulated to provide tax advice.
- A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). 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, tax legislation and regulation which are subject to change. You should seek advice to understand your options at retirement.