3 powerful and practical reasons to consider consolidating pensions

3 powerful and practical reasons to consider consolidating pensions

According to the Times, an estimated 1.6 million pension pots with a combined value of £19.4 billion are lying dormant in Britain because they’ve been “lost”. Furthermore, the number could triple by 2035.

One reason for this is that when people move jobs, they typically don’t take their workplace pension with them. Even when it’s possible to merge your former workplace scheme with one being offered by a new employer, very few people do it.

As a result, workers usually have several different pension pots that they could easily lose track of over time. There is good news though, as it’s possible to find lost pensions, which may provide your retirement fund with a significant boost and give you a better standard of living when you stop working.

If this is something you’ve already done, or are in the process of doing, you might be considering merging your newly found pension pots with others that you have.

Read on to discover three reasons you might want to consider doing this.

1. Consolidation could help expose your pension to the right level of risk

When you started your workplace pension all those years ago, you would typically have been provided with two options, which were:

  • Your contributions would be placed into investments with a level of risk you would have chosen.
  • Your money would have been put into a default fund by the pension provider.

Whichever it was, in the time that has since elapsed, the level of risk that’s appropriate for you could have changed, while your investment choice has remained the same. This means that your money might now be in a fund that’s too high-risk and exposes your money to too much potential loss.

Conversely, you could be taking insufficient risk, which could reduce its growth potential. This could mean that your pension pot is smaller than you need it to be when you finish work, which in turn, may result in a lower standard of living in retirement.

Part of the consolidation process involves a financial planner assessing the correct level of risk for you. This could help ensure that your money is exposed to a level of growth that will provide the lifestyle you seek in retirement, while at the same time exposing it to a level of risk you are comfortable with.

Please remember, exposing your pension to more risk should not be done lightly, as you may get back less than you initially invested.

2. Merging your pensions could reduce your pension costs

Having an old pension pot that you no longer contribute to could leave you thousands of pounds worse off.

Research published by Motley Fool shows many older pensions have higher fees than more modern funds, which could significantly reduce the pot’s growth potential or even eat into its value.

This means the size of the pension could be smaller when you come to draw an income from it, which might lower your lifestyle in retirement. Transferring an older pension to a more modern and less expensive scheme might reduce fees and help increase growth potential.

That said, never assume that consolidating your pension automatically lowers fees, or that it’s the best strategy for you. A financial planner can clarify the costs associated with your pensions and whether alternatives might be more cost-effective.

They will also provide reasons why you might want to consider staying with your existing policy, such as generous benefits you’d probably rather not lose. This could include a tax-free lump sum that’s higher than the typical 25%, or a generous guaranteed annuity rate that might provide a higher income when you retire.

3. Consolidating pensions might make them more manageable

Keeping on top of several pensions can be time-consuming and complex. As consolidating your pensions could mean you have fewer funds to monitor, it may be easier to see whether your retirement funds are on track to meet your goals.

If you work with a financial planner, they could also provide options to get your pension to where it needs to be, should you discover it’s not on track.

A financial planner can help you find lost pensions

If you have pensions schemes you’ve lost track of, a financial planner could help you find them. Furthermore, they can explain how you could use them to boost your pension fund, and whether consolidation is right for you.

Get in touch

If you would like help locating any lost pensions or would like to discuss consolidating your retirement funds, please give us a call on 0800 434 6337. We’d be happy to help.

Please note:

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

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.