What are the pros and cons of consolidating my pensions?

27 July 2020

With many people changing their employers multiple times throughout their working life, most have accumulated different pension plans and may not have had the time or inclination to review and consolidate them each time. By the time they come to retirement they can end up without having a clear picture on what options are available or the level of income they could receive going forwards.

The process of transferring most personal pensions into one scheme is relatively straightforward, but it’s definitely not a decision you should make lightly. As different schemes have different rules, it can be difficult to know whether or not consolidating the plans into one is the right option. Zoe Bailey, financial planning director at Tilney, looks further at some of the pros and cons of consolidation.

What are the potential benefits of transferring my pension plans into one?

“There are a number of benefits to consolidating your pensions. One of the greatest advantages is peace of mind and the ease of administration. Receiving lots of statements and paperwork for different plans can feel overwhelming. With just one pension, it’s much easier to understand and keep a track of everything.

“As you’ll only receive statements for one plan, record keeping becomes much easier too. This is particularly useful if you want to make a large, one-off contribution and to make use of your pension carry forward allowance to mop up any unused allowances from the previous three years. It can end up being quite a mammoth task if you have a multitude of pensions that you’ve been contributing to, because you have to contact each provider for information and basically, you’ll be held back by the slowest one of them.

“I’ve also found that when pensions are consolidated into one, monitoring their investment performance is much simpler. Pension providers tend to report past performance in different ways and sometimes these reports are made at different times – one may come at the beginning of the year, another in the middle and the other at the end. If you have one pension, you know every time where you stand and how it is performing. What’s also easier about this is the control you have over the underlying investments. So it’s quite important if you’re going to have just one pension, that you have one that offers a lot of fund choice, is reasonably priced and has a good administration team.  

“One of the main misconceptions about transferring your pensions into one is that you will reduce your investment diversity, which is not necessarily true. Quite often, when we’ve spoken to clients and looked at all their pensions, we’ve seen that they’re not diversified at all because they’ve stayed in the ‘default’ funds offered by each provider and these are often very similar – for example, they might be all UK funds. If you find a provider with a good selection of funds, you can have a range of investments all held within the same plan.

“Another one of the main potential benefits of consolidating your pensions is that you can now understand all the charges you are paying and there may even be a reduction of charges as a result of consolidating them to one policy. With some schemes, for example, when the fund value of the pension goes above a certain amount, you receive a discount on your whole Pension which you may not qualify for if you spread the contributions across different providers.

“Your current policies may have also not evolved with you and your changing risk profile and risk tolerance over time. If your pensions are all in one place, it can also help you to more clearly see if the underlying investment strategy is still suitable for you. This is crucial to review at least every three years, and you may now find that your old Pensions are invested in portfolios that are now too low or high risk for you. Different pension providers offer different strategies - some might have 10 options while others might have many more to choose from. It’s about understanding what the right investment option for you is and then consolidating your pension savings into the right strategy.

“You may want to transfer your pensions in order to give yourself greater choice and flexibility with your retirement savings. Some schemes which were established before 2015 (prior to Pension Freedoms) may not have the flexible options that other newer pensions have. Income drawdown (also known as flexi-access drawdown) came into effect in 2015 and it allows you to access your pension savings whenever you need to from age 55, while reinvesting your remaining funds in a way that is designed to provide an ongoing retirement income.* If you retain an older pension, when the time comes for you to access it, you might have to transfer it anyway to another one in order to receive the benefits you are looking for.

“Finally, by consolidating your Pensions into one policy, where appropriate, and even just beginning this exercise of reviewing each of them, this will enable you to have a far clearer picture and understanding of what you have built up so far, what you may need to continue to save and all your income options in retirement.

“Completing this exercise has even helped some clients to understand that they are closer to or have already achieved their goals without knowing, and this has enabled them to retire earlier than they thought possible!

What should I consider before consolidating my pensions?

“The main aspect to consider during the review of your places and any before consolidation is what might be lost. Some older Pension polices could have valuable guarantees, such as Guaranteed minimum Pensions or protected higher Tax Free Cash percentages. These could be lost on transfer. You should always seek advice should you feel you any of your policies could contain these.

“The cost of transferring varies between providers. Whenever you move pensions, there are further considerations to be made and one of them is the exit costs versus the cost of the new pension. Exit fees are capped if you are close to retirement, so in a lot of cases, the exit costs do go down with time and may not apply anymore to your policy.

“To balance out the trade-off between the exit charges and potential reduced ongoing charge, you need to compare five years’ worth of charges on the one new plan against the exit charges from all the plans you are looking to consolidate and then make an assessment. If you’re not planning on touching your pension for another 10 years or longer, then some penalties would become cost effective in the long term because you will be saving over the longer term. 

“I think it’s important to say that while costs are important, it shouldn’t always be assumed that cheaper is better as it often all depends on you and your objectives and the service you now want going forwards. If you’re fee-conscious, then we need to assess the cost of the current structure, the benefits of staying with this provider and check if this is the right approach for you to continue with going forward. When you consider what you want to achieve, the fund or underlying investment strategy may be more expensive for a reason as it may give you more of a structured and suitable approach. In some cases, I have found that a new plan costs more than the old ones, this is only because you have to pay more now so that your overall service can improve and your pension can achieve what you want and need it to.

“For example, you may need to transfer your Pension to ensure you can draw your income flexibly in retirement and leave any remaining funds to your beneficiaries in the way you wish to.

“Consolidating your pensions is not something that should be taken lightly. For some people it will absolutely be the right thing to do, gives huge peace of mind and enables them to retire earlier; for others, some caution will be needed. As always, it is best to seek professional financial advice to understand all your options before making any large financial decisions.”

About Tilney

Tilney is a leading investment and financial planning group that builds on a heritage of more than 180 years. Our clients are private investors, charities and professional intermediaries who trust us with over £24 billion of their assets. We offer a range of services including financial planning, investment management and advice and, through our Bestinvest service, a leading online platform for those who prefer to manage their own investments.  We have won numerous awards including Wealth Manager of the Year, Best Discretionary/Advisory Wealth Manager, Best Low-cost SIPP Provider and Best Investment Platform 2018 as voted by readers of the Financial Times and Investors Chronicle; Best Advisory Service in the 2015 City of London Wealth Management Awards; and Investment Award – Cautious category in the Private Asset Management Awards.

Headquartered in Mayfair, London, the Tilney Group employs over 1,000 staff across our network of 30 offices, enabling us to support clients with a local service throughout the UK.