The pension pot puzzle - should you consolidate?

It can be a consolidation conundrum to know when it makes sense to combine different pension pots, and when you are better off keeping separate accounts.

The days of a job — and a pension — for life are long gone. People in the UK now have an average of 11 jobs during their working lives, which can mean a similar number of separate company pension plans, alongside any private savings.  This might include personal pensions, stakeholder pensions or SIPPs (self-invested personal pensions).

Keeping track of these can be tricky, which is why many people choose to consolidate these pension plans, often within a SIPP.

However, there is an old investment adage about not putting all your eggs in one basket, and in some cases this will apply to pension pots, as well as the underlying investments.

Many people are more comfortable splitting their money between a number of providers, so that it is not concentrated with any one company. This can help spread risk and may give a wider investment choice.

However, it’s worth noting that pension providers are required to hold clients’ money in a separate account. This means if a SIPP administrator runs into financial difficulties, customer funds should not be at risk.

For those thinking about consolidating their various pension pots there are some key considerations to bear in mind.

Don’t miss out on employer contributions

You may want to consolidate some older pension plans, but don’t switch a current workplace pension. Your employer is likely to contribute to this, and if you move you may miss out on these contributions, which can significantly boost overall returns.

Reducing overall charges

Some older-style personal pensions will have higher charges which can eat into returns, so it can make sense to move these to a lower-charging SIPP. But before you make the switch it is worth doing the sums. Look at charges on older contracts, and compare charges on various SIPP plans to make sure you are getting value for money.

Charges can be complex: there are often administration charges, platform charges and underlying investment charges to take into account.

If you are unsure contact your pension provider to get a clearer picture of what you are paying.

Don’t lose valuable benefits

Older-style pensions may have higher charges, but some have valuable additional benefits too — such as guaranteed annuity rates, at-retirement bonus payments, or even a spouse’s pension. If you move your pension you stand to lose these, which in most cases, is unlikely to be in your best interests.

Similarly, most people are advised not to switch ‘defined benefit’ pensions, which pay a guaranteed salary-linked pension in retirement.

If you are unsure what type of pension you have, or what benefits it offers, seek advice before transferring funds, as you won’t be able to switch back at a later date.

Watch for exit fees

Some pension providers will charge an exit or transfer fee, which can reduce the value of your holdings. If the pot you are looking to transfer is fairly small these can seem disproportionately high, so it may be worth staying put to avoid this fee.

Enhancing investment performance

Look at the investment returns on these various pension pots, and where your money is invested. Is it in a default fund, for example, and what options are there to alter the underlying investments if it has underperformed?  If there are only a limited choice you may want to consider consolidating into a SIPP, which typically offers access to a wide range of over 2,000 investment funds, as well as direct shareholdings.

Making the most of digital services

If you are the kind of investor who likes to view your pension on a regular basis, to increase contributions or switch holdings, you may want a SIPP that offers online access to your account. Many older pension plans may still rely on annual paper statements, and not offer this kind of digital capability.