Consolidate your pensions

The days of a job for life, and a single pension to go with it, are more or less over. Life is much less tidy these days, with many of us changing jobs as many as 10 times in the course of our working life.

This means, if you've joined some or all of your employers' pension schemes along the way, you have probably left a trail of bitty pension pots behind you.

Tom McPhail, head of pensions research at broker Hargreaves Lansdown, says there are now more deferred occupational pension accounts belonging to former employees in the UK than there are active pensions still receiving regular contributions.

"There's no hard data on the average number of pension accounts people accrue," he says, "but we can make a rough estimate that if you have a pension and haven't yet retired or consolidated them, you'll have an average of two or three."

So what happens if you don't do anything about tidying up your pension portfolio?

If it's held in a money purchase scheme (also called a defined contribution scheme), as most occupational pensions are these days, the money will remain invested – and hopefully growing – in the pension funds you selected, until you start taking benefits.

If you didn't specify any particular fund choice when you set it up, as 80% to 90% of people don't, your money will be in the scheme's default fund.

Why consolidate?

In principle, there are several strong arguments for pulling old pensions together into a single account.

Perhaps the most significant for most people, is the fact that it can be difficult to work out how much you've actually got when your holdings are scattered around.

"Clients get a huge amount of paperwork from different companies, with separate statements for pensions and for protected rights funds, usually in different styles so they can't easily make direct comparisons," says Neil Mumford, director of specialist adviser Milestone Wealth Management.

"It can be very confusing, so they need help working out what they have got, and then they need to simplify the situation and cut down on the paperwork."

Another problem is that circumstances change: companies get taken over, pension schemes are moved from one insurer to another, and the insurers themselves may be bought out or merged.

As a consequence, it can be hard to keep track of who's running your pension and of how good a job they're doing.

"People do lose track of their pensions, so it's good to know exactly where everything is and who is managing it," says Allan Maxwell, director of the Corporate Benefits Consultancy.

High charges may be another factor that should encourage you to move your pensions, says McPhail. "The old personal pension charges, in particular, can seem pretty hefty compared with stakeholder pensions."

It may also be the case that you just don't like the limited range of boring pension funds available and want greater control over how your money is invested.

In short, consolidation is generally about greater choice, better value for money and easier organisation.

Is is always a good idea?

There are various circumstances where moving your pension is much less likely to be a good idea – most obviously if it's a final salary scheme.

"Final salary schemes should generally be left where they are, because they offer strong guarantees and it's very unlikely that the transfer value will compensate for the benefits you're giving up," says McPhail.

However, even with final salary arrangements, it may be more sensible to move your pension if it's worth a lot and you're worried about the solvency of the company.

Under the terms of the Pension Protection Fund, which compensates pension holders if an employer goes bust, ex-employees under retirement age would receive no more than 90% of their original pension, so it could make financial sense to take the hit on the transfer value.

"It's really important to get professional advice in this situation – it's possible to do a critical-yield analysis which will tell you how fast the new scheme will have to grow in order to match the benefits you're giving up," McPhail explains.

Maxwell adds that a client's individual circumstances may also favour transfer out of a final salary plan.

"These schemes usually pay benefits at the age of 65 and also pay a spouse's pension after your death – but if you're in ill health and aren't married, it may be preferable to move it to a more flexible arrangement where you can access the money earlier," he says.

Leaving aside final salary schemes, however, there are other occasions where you're generally better off leaving your pension where it is, so it's really important to get expert help and ensure each individual pension policy is scrutinised carefully.

In some cases, these may be to do with the terms of the policy. "For example, some older money-purchase policies dating back to the 1980s offer very generous guaranteed annuity rates which you'd lose if you moved your money," says Maxwell.

"It may also be the case with these older policies that you're allowed to take more than 25% of the fund as a tax-free lump sum. I had a recent case involving a pension dating from the 1970s which allowed the client to take 50% as tax-free cash."

In other cases, the charging structure is a problem. Exit penalties – in the worst cases amounting to 10% or 20% – are widely imposed, making it less cost-effective to transfer out.

In with-profits policies, these can take the form of a market value adjustment (MVA) that reduces the payout; in unit trust investments, a charge may be applied to cover the costs of the annual charges lost by the pension provider as a result of the transfer.

So before you transfer anything, contact each deferred pension provider and check what the transfer value will be and what the penalties are.

If consolidation still seems a good idea, a specialist can tell you which policies, if any, should be left where they are. The next question is where to transfer the rest to.

Where should you go?

For sheer simplicity, the best option is a stakeholder pension with a limited choice of funds and capped charges.

McPhail recommends Standard Life and Aviva's stakeholders: "They offer a reasonable range of funds, and annual management charges are below 1%."

If you're more interested in investment freedom, then a low-cost self-invested personal pension (SIPP) provides access to the full spectrum of funds, as well as other investments such as direct equities and exchange traded funds.

Conventional wisdom has been that you need at least £50,000, and ideally £100,000, to make a SIPP cost-effective, because of the charges of the wrapper itself.

However, as McPhail says, "online SIPPs can now be cheaper than a stakeholder pension".

Several providers, including AJ Bell, Hargreaves Lansdown and Alliance Trust, charge no set-up or administration fees for the wrapper, although once you move away from ordinary collective funds there may be other charges involved.

Interactive Investor charges a quarterly administration fee of up to £37.50 plus VAT, but its transaction charges are low.

Alternatively, depending on what kind of scheme is on offer, you may be able to transfer to your current employer's pension if the charges are lower or the choice of funds is better.

But a separate personal pension of some kind could provide more flexibility at retirement, as well as avoiding the risk that all your savings end up in one basket.

The transfer process itself can be a bit wearisome. An IFA will do the work for you, but if you don't want to pay for advice, Adrian Lowcock, senior investment adviser at Bestinvest, recommends the following:

"First, contact the pension provider you want to move to and get an application form. Then get in touch with all your existing providers and ask them to send you the discharge papers for your old schemes.

"Make sure everything is completed – your new provider should be able to help if necessary – and then submit the discharge papers with the application form to the new provider."

Lowcock says the whole process can take four to six weeks, though he warns that it's important to stay on top of it and chase the paperwork up if necessary.

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Your Comments

 Yes what a super idea.! I consoldated mine into Equitable Life in 1997. That cost me £60,000.

No sign of compensation in spite of pre-election promises.

 Yes what a super idea.! I consoldated mine into Equitable Life in 1997. That cost me £60,000.

No sign of compensation in spite of pre-election promises.