Gone are the days when most people would work in the same job with the same company for decades. The landscape of modern work has shifted, resulting in many workers switching jobs as often as every five years, according to a BBC report from 2017.
This means that, by the time you retire, you may have accrued a number of different pension funds with several different providers.
This makes it really easy to lose track of some, fail to check whether they still offer good value and decent investment returns, or forget that they exist entirely.
The answer to this problem could be pension auto-consolidation, but are there downsides to this method? Read on to find out more.
72% of Brits support auto-consolidation, but may not be aware of the negatives
According to research from Scottish Widows, more than 3.6 million Brits don’t know how many pensions they have.
This puts them at risk of paying more in fees than they need to, and not getting what they expect from their savings. It also means that they have no idea whether their pensions will generate the income they want in retirement.
To tackle this issue, almost three-quarters (72%) of Brits support the idea of auto-consolidation, which would automatically consolidate small pensions into one fund as you change jobs.
This approach would prevent the need to track down all your old pension funds, making it easier to administer one single fund.
Combining your pensions is, however, an option already available to you. However, 10% of Brits say they have no idea how to do this, and 12% claim it is simply too much hassle. Because of this, more than two-fifths (44%) have never bothered to track down their savings from a previous employer.
While it may be easier to manage a single pension pot, you could potentially be turning down some built-in benefits from other pension schemes you may have. Read on for the pros and cons of consolidating your pensions.
Consolidating your pensions keeps them all in one place
There are several benefits to consolidating your pensions. First and foremost, consolidation makes it so much easier to manage your pension fund, as you don’t need to remember the location of every last penny of your savings.
With all your pension savings in one place, you only need to deal with one provider. It can make managing your savings much more straightforward.
It also makes it easier to measure whether your fund is on track to meet your long-term financial goals and whether it will be able to support you for as long as you’d like.
Consolidating doesn’t only help with the management of your savings
Additionally, consolidation may result in lower fees, which could save you money in the long run, depending on which fund you choose. Each pension provider charges management fees when handling your pension; a fact that the Telegraph discovered less than half of Brits are aware of.
There are a lot of different types of charges in terms of your pension, but if you have multiple funds, then you could be paying more fees than you need to.
Combining them all into a single fund could be cheaper than keeping them all separate. This can boost the value of your fund and help you to reach your desired level of saving sooner.
Lastly, consolidating your pensions together could give you access to a greater variation of investments. You may be able to choose more diverse funds, or those which align better with your goals and tolerance for risk. For example, your old pensions may be invested in funds which offer either too much or too little risk.
You may be losing out on certain benefits through auto-consolidation
While there are many advantages of consolidating your old pension pots, there are some factors to consider.
Firstly, by consolidating you may be taking money out of pension funds that were performing very well. You may have existing funds that have generated excellent returns and may have low fees. You would need to ensure you could benefit from similar growth and charges elsewhere.
Consolidating may also result in you missing out on certain benefits of your other pension schemes. These could potentially include early access, guaranteed annuity rates, or the ability to take more than 25% as a tax-free lump sum. Some pension schemes even come with life insurance or critical illness cover, which are useful benefits in their own right.
Lastly, some schemes come with exit fees, which will be levied if you transfer your pension. These fees can often be quite high and may offset any benefits you would have gained from the initial consolidation.
Seek financial advice if you’re thinking of consolidating your pension
Consolidating your pension is not a decision that should be made lightly. If you’re thinking of doing so, or you’re not sure whether it would be a good idea, get in touch with us. We can help clearly lay out your options and decide on what’s best for you.
Contact us by email at firstname.lastname@example.org or call us on 01189 876655.