What to do if you have multiple small pension pots
Chris Broome – Chartered Financial Planner
Throughout your career, you’ve probably contributed to a few pensions. It can be easy to lose track of them, so you may have considered consolidating them into one larger pension instead.
Indeed, research from the Pension Policy Institute shows that there are eight million deferred Workplace Pensions with values under £1,000. You could be neglecting to factor these savings into your retirement plan and continuing to pay administration fees that may entirely negate any investment returns.
If you have many small pension pots, now is a good time to make sure you don’t lose track of your previous contributions and think about the pros and cons of consolidating your small pension pots into one scheme.
Account for all your pensions
If you’ve had several jobs you could have multiple small pension pots.
In particular, you may have many Workplace Pensions. Since 2012, the government has required employers to automatically enrol the majority of employees into a Workplace Pension scheme. However, Financial Planning Today reports that 19% of UK workers are unaware of this.
Your first step is to make sure you don’t lose some of your contributions. Locate all the pensions you have paid into. To start tracking down ‘lost’ pensions, check any correspondence sent to you by your pension providers or old employers.
If you need help tracking down your pension pots, you can use the government’s free Pension Tracing Service. It will search a database of more than 200,000 Workplace and Personal Pensions to find the contact details for any schemes you may be a member of.
Should you consolidate your pensions?
If you do have multiple pensions, you may want to consolidate them. This will mean your retirement savings are held in one place, making it easier to manage. However, in some cases, it’s worth keeping pensions separate.
Answering these five questions can help you understand if you should make any changes.
What type of pensions do you have?
The kind of pension scheme you have affects income security in retirement.
A Defined Benefit pension provides a guaranteed income for life, often linked to inflation, which can provide financial security. As a result, leaving a Defined Benefit pension scheme is unlikely to be in your best interests.
In contrast, Defined Contribution pensions give you a final pension value based on how much you have paid into them and investment performance. Consolidating Defined Contribution pensions could reduce administration costs and make it easier to manage your retirement savings.
Do any of your pensions have additional benefits?
Some pensions offer additional benefits to their members. These may include a pension for your spouse or children, letting you take out larger lump sums tax-efficiently, or earlier access to benefits. It can be worth holding on to a small pension for continued access to these.
What is the long-term performance of your pensions?
If you choose to consolidate, think about where to put your money. Start by finding out how the money in your pension pots is invested. Assessing long-term investment performance can help you maximise pension savings through consolidation.
What administration fees do you pay, and what would be the cost of transferring?
Pension providers may take management fees as regular flat payments or a low percentage of your pension’s value. This means that administration fees for a particularly small pot could entirely negate its growth.
Compare the long-term costs of paying administration fees on multiple small pensions against the cost of a larger pension and you’ll likely find you save money that can be put towards your retirement.
How and when can you access your pensions?
It’s worth thinking about how and when you’d like to access your pensions too. Some small pensions may come with tax benefits when you make withdrawals, and these may be useful to you. If you’d like to discuss the tax implications of consolidating pensions, please get in touch.
Whether pension consolidation is right for you will depend on your pensions and goals. If a low-value pot has no features of use to you, think about consolidating it to make it easier to manage retirement savings. Conversely, even a small pot with benefits you want may be worth holding on to.
Get in touch
Planning for retirement can be challenging, especially when your savings are spread across multiple pensions. If you’d like help understanding what the best course of action is, including whether to consolidate, please contact us.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.