Is it time to tidy up your pensions?

Have you started the new tax year feeling like you didn’t quite take full advantage of the last one? All too often spring cleaning your finances seems to revolve around tax planning – ploughing money into individual savings accounts (ISA) and pensions to take advantage of the current year’s allowances before they’re gone for good.

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As sensible as that might be, provided you have the money to spare, it’s not the only way to whip your finances into shape. There are other bits of financial admin you can consider that can improve your long-term financial security, that don’t require you to find spare cash.

One is to declutter your old pensions and consolidate them into one pot – a move that could not only make your finances easier to manage but save you sizeable sums of money too.

The average worker in the UK is now reported to have an average 11 jobs during their lifetime. And with auto-enrolment potentially signing you up for a pension with each job, it’s easy to build up quite a smorgasbord of pensions, with some larger and meatier than others from roles we might have only been in for a short period of time.

The benefits of pension consolidation

The most obvious benefit of combining multiple pensions into one pot is that it becomes easier to manage and monitor your retirement saving.

A recent survey from Standard Life found that 49% of us are overwhelmed by the amount of pensions information we receive, with 41% saying they have no idea what to do with it all.

Consolidating your pensions means you can see the bulk of your saving in one place; you’ll have less paperwork and should usually be able to manage everything online. If you want to make changes to your investment strategy, that will be more straightforward too. And, as retirement draws closer, it will also be easier to see if you are on track to get the income you need.

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However, the benefits aren’t limited to admin. You could also give your pensions a substantial boost by consolidating them. That’s because the charges on modern online pensions, such as self-invested personal pensions (SIPP), are likely to be much lower than those being levied on older workplace pensions, especially those from the early years of your career.

You might also find that you are paying inactivity fees for workplace schemes you are no longer contributing to.

As a guide, you could be paying as much as 0.75% (or more) on an old-style pension, but with a SIPP, you should be able to pay less than 0.5%. Some pensions, such as the interactive investor SIPP also offer competitive flat fees, which means your charges won’t go up the bigger your pension gets.

Pension charges – especially when expressed as a percentage – often look minimal, but over time, with the power of compounding, they can place a substantial drag on your returns and significantly erode the value of your retirement pot.

Let’s say you had £150,000 saved up in an older-style pension with annual charges of 0.75% which you make contributions of £200 a month to. By transferring that pot to the interactive investor SIPP, according to analysis by the lang cat, you could save as much as £20,000 in fees over 20 years.

Finally, if you are a keen investor, you will also likely find that by transferring older pensions into a modern SIPP you will also get access to a much wider choice of investments. This includes funds, investment trusts, ETFs and UK and overseas shares. With many older pensions, you may be limited to a much smaller selection of funds.

What to think about first

While there are many arguments for pension consolidation, it’s not always the best option. Before you do anything, you need to consider the following:

• Is it a defined benefit (DB) pension?: you need to think very carefully before you cash in a DB pension and transfer into a defined contribution (DC) scheme, such as a SIPP. That’s because it involves trading in an inflation-linked income guaranteed for life in return for a lump sum that you will need to manage. For this reason, you need to get independent financial advice before you can transfer a DB pension with a transfer value of £30,000 or more.
• Will you be giving up any pension guarantees?: even if you are moving a DB pension, you should also check that you won’t be giving up any valuable guarantees if you transfer it. Some older-style pensions offer valuable benefits such as guaranteed annuity rates or pay survivor benefits. If you are lucky, it might offer more than 25% tax-free cash or a protected low retirement age, that let’s you access your pension earlier than the normal minimum pension age.
• What are the costs?: in addition to doing some due diligence around charges – checking that your new scheme has lower running costs than your existing one – it’s also important to find out if you will have to pay any exit fees to move your pension. Although exit fees aren’t permitted on pensions set up from 1 April 2017 onwards, they’re often charged on older plans. They are currently capped at 1% of your pot’s value, but this only applies once you have reached normal minimum pension age (currently 55 but rising to 57 from 2028).
• Do you have any pots worth less than £10,000?: small pots can often be a bit of a headache, but in some cases they might be able to add some flexibility to your planning. This is thanks to a little-known rule that lets you cash in pots worth less than £10,000 without triggering the money purchase annual allowance, which sees the maximum amount you can pay into your pension fall from 100% of earnings up to £60,000, to just £10,000. This can be helpful if you want to access a lump sum after the age off 55, but still need to carry on contributing to your pension. (Note: you will still pay tax when you cash in a small pot –the first 25% is paid tax free and the remainder is taxed at your marginal rate)

How to transfer a pension

The process of transferring a pension isn’t as complicated as it might sound – especially if you already have a SIPP to transfer the pots into. If not, you will need to open one.

After that, it’s simply the case of giving your chosen provider details of the schemes you would like to move and authorising the transfer. This typically takes between four to 12 weeks, but your provider does all the legwork and should keep you up to date with the process.

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Once the transfer is made, you will need to decide where to invest your money – this can seem daunting, especially if you were previously in a scheme’s default fund – but platforms offer plenty of guidance and tips. Although there are numerous choices, there are plenty of funds that make good core or single holdings – you don’t need to build an all-singing, all-dancing portfolio if you don’t want to.