A growing number of the people we work with come to us with several pension pots.
These have often been accumulated during a lifetime of working with different employers, and perhaps during periods of self-employment.
We will recommend pension consolidation where it is the right thing for the client to do; it’s not always in their best interest, and we have no axe to grind either way.
If it is right for a client to retain their existing pension pots, then that is what we recommend.
If there are more advantages associated with pension consolidation, we will recommend that course of action instead.
According to Aegon’s latest UK Readiness Report, there is a lack of consumer awareness surrounding the benefits of pension pot consolidation.
The research found that three-fifths of people are unaware of the benefits pension consolidation bring.
Aegon argue that, with 92% of the UK population currently falling short of their retirement targets, the need for understanding these benefits are particularly important.
Their research found that nearly two-fifths of the population have more than one pension pot.
This tallies with our experience of engaging with new clients who have multiple pension pots; in some cases, these are well into double figures!
Worryingly however, an additional fifth (22%) are unaware how many pots they have, which means that the number of people with multiple pension pots could be even greater.
This lack of pension engagement could have significant implications for saving levels.
Since pension freedoms were introduced in April 2015, we have found clients typically becoming more engaged with their pensions, viewing these as tangible assets rather than some distant benefit.
So what are some of the good reasons for pension pot consolidation?
In many cases, it can help lower ongoing charges.
Older style pension contracts were notorious for their high and complex charging structures, so moving to new pension plans with access to cheaper investment funds can save you a lot of money, especially over the long-term.
Consolidating your various pension pots allows you to apply one investment strategy to all of the money.
When you are planning for your retirement, it makes sense to take control over the investment of your pension monies so you can manage the risk being taken and align this with your retirement goals.
When pension pots are consolidated, it becomes easier to understand the value of your pensions and what these might provide for you in retirement.
You can also benefit from modern retirement income options once your pensions are consolidated, offering access to the pension freedoms introduced last year which are not mandatory for pension providers to offer their customers.
There are some disadvantages too
Of course there can also be some disadvantages associated with pension consolidation.
Consolidating your pension pots can mean giving up valuable guarantees, such as the promise of a guaranteed annuity rate. You need to check very carefully to make sure you don’t lose out.
You might also lose access to a guaranteed investment returns, which are sometimes a feature of older style ‘with profits’ funds within pension pots.
There can sometimes be exit or transfer penalties to consider, which will reduce the value of your pension pot.
However, if you can benefit from a lower ongoing charge then sometimes it can be worth suffering these transfer penalties as the overall long-term charge imposed on your pension pots will be lower.
You should always seek professional independent financial advice before you consider consolidating your pension pots.
We suggest working with an adviser who is not financially motivated to recommend you transfer; some advisers charge a percentage of your pension monies if they recommend you consolidate, which naturally creates a conflict of interest.
Instead, pay a fixed fee for independent financial advice so the adviser has no motivation to recommend a particular course of action, other than what is best for you.