Pension Consolidation: A Simple Guide

One of the most common questions I am asked as financial adviser is ‘what do I do with all of my pension pots? Should I consolidate them or leave them where they are?’

My typical response is that it depends on the details. So in this article I will run through some of the features to look out for:

1. Special benefits

This is the number one thing you need to make sure of: Do any of your pensions contain special privileges that are unavailable in the marketplace today? Most people do not have such benefits but it is crucial to check.

How do you know if you have them? You can wade through policy documents but it is better to get on the phone with your pension provider and simply ask. I will not get into how all of these special features work but I will name a few, which you could also include in your enquiry: Guaranteed annuity rates, guaranteed investment growth rates, guaranteed minimum pension (GMP), protected tax-free cash or if it is a Final Salary / Defined Benefit pension.

Once your pension provider confirms over the phone whether you do or don’t have any special benefits that are unavailable on the open market, you should ask for written confirmation to be sure.

If you are one of the lucky ones to have such special privileges, your default position should be to leave those policies where they are or seek FCA-regulated financial advice.

2. Charges

This one is a lot more straightforward. Which of your multiple policies has the lowest fees? Again, if the policy documents are confusing, you can call your provider and make sure they are telling you the total cost of investing. You should also find out if there are costs incurred when changing investment funds, making contributions/withdrawals or for transferring in/out.

When it comes to workplace pensions, it is generally better to consolidate into the policy that has the lowest fees. However, while costs matter, they are not the only feature.

3. Retirement options

This matters more if you are reasonably close to retirement. Ideally you want your chosen pension to have a full range of retirement options built into the policy. The main feature to look out for is if the policy has 'flexi access drawdown' as this usually determines whether you can access your 25% tax-free cash without having to transfer the pension elsewhere.

4. Transfer/contribution restrictions

Does your previous workplace pension allow transfers in? Does it allow you to make new contributions? If not, this is a sign that you could have something better unless the policy happens to be coupled with any special benefit guarantees.

5. Investment options

This is a lot less black and white. If you are receiving financial advice or have professional experience investing in stocks and bonds, then it is better to prefer the pension that has the widest range of investment options. However, if you are unconfident with your investing knowledge, which most people should be, having a restricted investment fund range makes the choice less overwhelming as it typically offers just a handful of options that vary in risk profile or ethical preference.

Consolidation Risks & Disclaimers

There are a number of risks you should be aware of before deciding to consolidate your pensions:

• Time out of the market: When one pension is transferred to another, there is usually a period of a few days or a few weeks where the money in transit is temporarily uninvested. When it comes to financial markets, a lot can happen in a very short space of time. This adds a layer of risk to the process – you could get lucky by avoiding declines or unlucky by missing out on gains.
• Investment choice: By choosing to consolidate your pensions you are effectively deciding that one pension provider’s investment fund is better than all of the others’. While costs matter, the main determinate of your future returns will be the choice of the investment, which cannot be covered in one article.
• Dangers of DIY: While it is in my interest as a professional adviser to say you should seek financial advice on pension consolidation instead of doing it on your own, it is also my regulatory obligation to do so. However since getting advice is usually not a legal requirement for pension consolidation, I hope this guide can encourage the would-be DIYers to be more informed and meticulous before proceeding.

Thank you for reading and please take care.