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Pension consolidation: how to combine multiple pension pots

Pension consolidation: how to combine multiple pension pots
It’s a good idea to find out exactly how much you have in your pension at any stage in your working life – although sooner is better than later, so you can manage your money more effectively. Consolidating your pensions is an easy way to do this.  
This article will reveal what pension consolidation is, how to do it and whether it's right for you.

What is pension consolidation?

Pension consolidation is when you combine all (or most) of your pension pots into one.
Throughout your career, you’ll likely work for various employers and build up many different pension pots via various schemes. 
On top of this, you may also have a personal pension, especially if you’ve been self-employed.
At some point in your life, you’ll have to decide whether to consolidate your pensions or leave them separate.
Working out the best thing to do for you will depend on many factors, such as what type of pensions you have, their value, how well they are being managed, and if they have any special guarantees attached.
We'll now reveal what you must consider, which you can discuss further with a financial adviser.

Should I combine my pensions?

There are many reasons to consider pension consolidation, including saving money, achieving better investment returns, convenience and keeping track of your various pension pots.
Image of an older lady sat at a table looking over her finances and considering her options

Can I save money?

As every pension pot you have is managed separately, each one has its own annual management fees.
This can vary as some may be higher than others. While some fees are 1% or more, others are 0.5% or less.
You may be tempted to combine your pension pots into the one with the smallest management fees to save money, but getting financial advice beforehand is recommended.
An adviser may be able to help you find a fund with lower fees. Not only can this save you money, but it can also impact the size of your pot, as high fees can reduce its size over a long period of time. 

Can my pensions achieve better returns?

One vital factor to consider with pension consolidation is fund performance.
If you have many pots, there’s a chance that one has outperformed the others, so you might be tempted to combine all your pensions into this one.
Of course, don’t forget that past performance is not a guide to future performance.
Also, it’s worth considering the consistency of your pension fund’s performance over time or trying a new fund. A financial adviser can offer guidance so you can make the best choice.

Does pension consolidation make it easier to manage your pensions?

Yes, having one pension pot is easier than handling several, but managing your pots involves more than checking your balance every now and then.
You should ensure you are invested in the right fund for your risk attitude, which may change closer to retirement.
And more importantly, it will be easier to draw your pension if you only have one pot.

Keeping track of your pensions

When you have many pension pots, you’re at risk of losing track of one or more of them.
For example, when you move, you may lose paperwork or forget to inform any pension providers of your new address.

Can I combine my defined benefit pensions?

If you have a defined benefit or final salary pension, you may be able to transfer it into a defined contribution pension.
You should think very carefully before making a decision and consider taking financial advice.
These transfers involve trading a guaranteed lifelong income for a finite sum of money.
It is usually a legal requirement to seek independent advice before transferring a final salary pension, as this is a huge decision and cannot be reversed.

Are there any reasons not to consolidate my pensions?

Consolidating your pensions is usually a wise move, although there are some circumstances in which it isn’t the best option.
Unbiased can connect you with an independent financial adviser so you can decide whether pension consolidation is right for you.
Some reasons not to merge your pensions are outlined below. 

Are any of your pensions final salary?

A final salary or 'defined benefit' pension offers a guaranteed income for life, which is an extremely valuable benefit.
This income won't be impacted by stock market volatility and, in the case of scheme failure, should be covered by the Pension Protection Fund.
However, if the transfer value is quite small, or you are worried about the scheme's future prospects, then ask an adviser whether a transfer is the right option.

Do any of your pensions have guaranteed annuity rates?

Some pension schemes offer a guaranteed annuity rate (GAR), which may allow you to buy an annuity with a much higher annual income than you would otherwise be offered.
It may not be clear from your pension provider if you have one or not, but an adviser can check this for you.
Having a GAR is usually a good reason not to consolidate your pensions, as by doing so, you would lose this benefit.

Are there any penalties for transferring your pension?

You should check to see if your pension’s transfer value is the same as its current value.
If it is lower, then this may be due to penalties for transferring. If there are, your adviser will need to check these penalties and whether they can be removed. 

How do I decide if I should combine my pensions?

Your adviser will go through your pensions with you and liaise with your providers to help you build a clear picture of your pension pots.
They can then give you an unbiased recommendation based on what you want from your retirement.
There is no one right answer when it comes to transferring pensions, which is why financial advice is essential.
Don’t forget that you can top up your pension before retirement by making additional contributions.

Am I saving enough for retirement?

If you want to know if your pension pot will be enough for your retirement, there is an easy way to find out.
Check out our article on how much to save into a pension or try Unbiased’s pension calculator to see how much retirement income you might receive.
Here you can find out more about planning for your retirement
If you’re struggling to decide whether to combine your pensions, Unbiased can connect you with a financial adviser regulated by the Financial Conduct Authority (FCA).
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