If you've got more than one pension pot, you should seriously look into whether or not you should do this.
But don't assume that consolidating is the right thing to do, because sometimes it's not. There are pros and cons to tipping your smaller pension pots into a single, bigger one. It's important that you take the time to understand the benefits and any potential downsides, so that you can make a well-informed decision.
Let's walk through what you need to think about, so that you're better placed to make this really important choice.
Consolidate to take control
If you're looking into whether or not to consolidate your pensions, it's because you've got more than one pension. That's perfectly normal - many people accumulate several pensions during their working life.
You probably joined a new pension scheme every time you changed employer.
When you join a new scheme, you don't lose the old one. The pot of cash that you, and your employer, put money into, remains yours for life. That's why it's important to keep hold of any documents relating to your workplace pension - it's your money.
The average person will be part of 11 different pension plans during their working life. That's a lot of paperwork to keep track of!
Inevitably, some of these documents get misplaced and people may forget that they even have a pension from a particular job. Some older pension providers only send you your annual statement by post once a year and if you have not updated your address with them, it is likely you are not being contacted. There's an incredible £20 billion in 1.6 million pension funds that have become disconnected from their rightful owners.
When you're deciding whether or not to consolidate pensions, the first step is to identify how many you actually have.
If you think you may have lost track of a pension or two, you can use a pension tracing service to help find it. Raindrop offers this service. You give us some basic information and we'll search through the records to see what we can find and help you consolidate your pensions.
Consolidate to simplify
If you're like the average person and have been part of around 11 different pension schemes, you'll have amassed a big stack of pensions paperwork. Every year you'll be getting 11 different statements and updates, all presenting information slightly differently.
When you have questions, you could need to contact 11 different organisations - some by post, some by email and some by phone. Calling 11 different pension providers can mean you spend a lot of time listening to on-hold music! From our experience a lot of our customers have wasted hours on the phone to their old providers and have not heard back from them.
All that administration - opening and reading letters, filing them, contacting your pension company - uses some of your precious time. If you can reduce the number of companies you deal with to just one or two, that could free up quite a few hours.
Consolidating your pensions into just one or two schemes can make it much easier for you to keep track of your savings.
Consolidate to accumulate
If you have, say, 11 different pensions, you're also paying 11 different sets of fees.
Pensions are a form of saving that typically grows because the money is being invested on your behalf. The pension company managing your pension plan doesn't provide this service for free - they charge you for their work. That charge isn't immediately obvious, because they take it from the cash they're managing.
Every pension company has their own way of calculating fees, so the charges probably won't be the same for each. They also have different approaches to investing your money, so some will give you a better return than others.
It's a mistake to assume that you're getting the best value for money from each of your pension schemes. Some will be performing better than others.
By choosing to consolidate your pension schemes you could reap a double benefit. Firstly, the overall management fees could go down, as typically the costs of looking after one larger pot are less than the costs of managing many smaller pots. Secondly, the overall investment performance of your pension could improve.
Values of pension plans can fall as well as rise. If you consolidate, you can choose to take out a pension plan with a provider that has a better track record on performance. Bear in mind that past performance does not guarantee what happens in the future.
Consolidating your pensions could help make them more valuable, giving you a larger pension pot when you decide to retire.
Consolidate with care
There are lots of good reasons for consolidating your various pensions into just one with a single provider.
However, putting multiple pots into a single one may not always be the best choice.
Final salary pensions
A final salary pension is also known as a defined benefit pension. These are increasingly rare and most are closed to new members. That's because they guarantee a pension for life, which could be hugely valuable.
You can probably transfer out of a final salary scheme if you choose to. They'll calculate a lump sum you can put into another pension. If you're considering this, it's wise to take professional advice or visit the UK Government’s Pension Wise service.
Some pension schemes come with additional rights, such as guaranteed annuity rates. If you take money out of these schemes in order to consolidate, you will probably lose these extra rights. Any rights you have should be made clear in documentation you have about your pension scheme.
Penalties for leaving
Exit penalties are charges you're required to pay if you decide to leave a pension scheme. Many schemes don't have these penalties, but if yours does, it could reduce the value that you can transfer elsewhere.
Tax advantages of small pension pots
If you have a pension that's worth under £10,000, there are some tax benefits to keeping it separate from your other pensions. That's because special rules allow you to take up to three separate pensions of up to £10,000 each without impacting some of the allowances around pension saving.
Your attitude to risk
An argument for not consolidating all your pensions into a single pot is that you're spreading the risk. If you have multiple pots, and something unfortunate occurs to one of them, it shouldn't affect the others. That said, if a particular pension scheme fails, there's likely to be some protection under the Financial Services Compensation Scheme.
We recommend that you look into all the implications and take professional advice before you decide to consolidate pensions. It's your money, which has been saved to give you an income in retirement. You want to protect it.
If you are considering consolidating your pensions with a view to starting to take your benefits from them, you should consider speaking to a financial advisor, or visiting the UK Government’s Pension Wise service, to help you decide what the best option for you might be.
Consolidate and keep saving
You can bring your various pension pots together at any time before you start taking money out of them. You don't need to wait until you're nearing retirement - you can consolidate pensions at any time during your working life.
If you decide that it's right to consolidate pensions, you can do so, even while you're still putting money into one. You could choose to gather up your old pensions into your current workplace pension, and keep doing this every time you change employers. This means all your pension savings will follow you through your career, and you'll have just one pension provider to deal with when you reach retirement.
The benefits of consolidating your pensions
When you bring all your old pensions together into a single pot:
- You cut the hassle of dealing with lots of different pension companies.
- You're likely to reduce the management fees that you're being charged.
- You'll know exactly how much your pensions are worth.
- Your money could be working harder for you, although this is not guaranteed.
- You'll have just one pension payment coming in once you retire.
Consolidating your pension with Raindrop
Raindrop can help you trace your lost pensions. We can also bring all your pensions together into a single scheme, making it easier for you to manage.
Our pension investment plans are run by world class money managers: BlackRock and Legal & General.
Start your pension finding and transfers here.
Once you start the pension search process with us, you'll be able to monitor progress through 24/7 online access. There's no separate fee for finding and combining your pensions - you'll be charged an all-in-one fee for managing your combined pension pot.
If you do chose to consolidate your pensions with Raindrop, please note that the value of your pension can go up as well as down. As with all investments your capital is at risk.