What To Do With Multiple Pension Pots?

Many people in the UK accumulate multiple pension pots from different employers as they change jobs over the years. The average person in the UK changes jobs 10-15 times in their career, resulting in the potential to have multiple pension schemes that need to be tracked and managed, which can lead to confusion and inefficiency in managing retirement savings. So, is it a good idea to combine these pension pots, and if so, how should you go about it?

Since 2012, employees in the UK have been automatically enrolled in workplace pensions if they meet certain criteria, e.g, being over 22 years old, and earning above a certain threshold. This means that each time you change jobs, a new pension pot is usually set up by the new employer. Different employers may offer different types of pension schemes, such as defined contribution pensions, workplace pensions, or private pensions, which means people can end up with a mix of various pots over their career.

Benefits of Combining Pots

Combining pension pots can make sense in several situations, especially if you have multiple pots scattered across different providers. Firstly, instead of managing several smaller pots from different employers, combining them into one can make it easier to keep track of your retirement savings. You’ll only have one provider to monitor, making it easier to review your pension’s performance and ensure it meets your needs.

Second, some pension providers charge higher management fees for smaller pots. By combining your pots, you may be able to reduce these fees, especially if the new scheme offers lower fees or better value.

In addition, a larger combined pension pot may provide access to better investment options, potentially resulting in higher returns. Some schemes offer lower-cost, high-performance investment funds when you have a larger sum invested.

Finally, when you retire, managing one pension pot can make accessing your retirement income easier and less time-consuming compared to managing several smaller pots.

Drawbacks of Combining Pots

While combining pensions can be beneficial, it’s important to carefully consider any potential downsides.

Some older pensions or final salary schemes offer valuable benefits, like guaranteed income or inflation-linked increases. If you transfer a final salary pension into a defined contribution pension, you risk losing these benefits. For example, a defined benefit pension might provide a guaranteed income based on your salary and years of service, which can be much more valuable than the returns you might expect from a defined contribution scheme.

Some pension pots, particularly those that are older or with certain providers, might charge exit fees or penalties for transferring out. These charges could eat into your pension savings.

Transferring pensions could expose you to different investment risks, depending on the type of scheme you transfer to. For example, if you’re transferring into a scheme with higher-risk investments or less favourable options, your pension pot could lose value.

Also, some employers offer additional benefits or contributions to their pension scheme. If you transfer a pension out of an employer scheme that’s offering matching contributions or bonuses, you might lose out on these extra benefits.

How To Combine Pension Pots

If you decide to combine your pension pots, here’s a guide to the process:

1. Identify and Review Your Pots

Gather information about all your current pension pots. You’ll need to know the names of the pension providers, the type of scheme, and the value of each pot. If you have any final salary or defined benefit pensions, it’s particularly important to seek advice before transferring, as these pensions have valuable benefits that may not be replaced by defined contribution schemes.

2. Understand the Terms of Each Pension Scheme

Check the management fees, exit charges, and any penalties associated with your current pensions. If your pension pots have high fees, transferring them to a scheme with lower fees might be beneficial. Assess how well your current pensions are performing. If your pots are performing poorly, or if the investment choices aren’t suitable, it may be time to consolidate them into a better-performing scheme.

3. Seek Financial Advice

If you have more than £30,000 in a defined benefit pension, you are required by law to get professional financial advice before making any transfer. Even for defined-contribution pensions, it’s often a good idea to consult with a financial advisor to ensure you’re making the right choice for your future.

4. Choose the Right Pension Scheme for the Transfer

If you decide to combine your pensions, you’ll need to choose where to transfer them. Some options include: Your current employer’s pension scheme (if available and suitable); a personal pension plan that you manage independently; or a Self-Invested Personal Pension (SIPP) if you want more control over your investments.

5. Complete the Transfer Process

Once you’ve chosen where to transfer your pensions, you’ll need to contact the new pension provider. They will typically handle the transfer process for you. Make sure the transfer goes through smoothly, and keep track of the process to ensure that your pension pots are combined correctly.

Alternatives to Combining Pension Pots

If combining your pensions doesn’t seem right for you, there are alternatives:

• Leave them where they are: If your pension pots are performing well and the fees are low, you may choose to leave them where they are.

• Monitor your pensions regularly. Even if you don’t combine your pensions immediately, it’s important to review them periodically to ensure they remain suitable for your retirement goals.

• Consolidate later – you can always choose to consolidate your pensions closer to retirement when you have a clearer view of your financial needs.

Combining pension pots is a personal decision and one that requires careful thought and professional advice, especially if there are valuable benefits involved. Make sure you look into all the pros and cons, and seek advice if you are unsure.