Pension consolidation: all you need to know

With the disappearance of ‘jobs for life’ with a pension attached, and the rise of careers involving multiple employers and a corresponding deck of pension schemes, a new concern has emerged to complicate our long-term financial plans: lost pension pots.

Most of us now expect to switch employers several times in the course of our career, especially earlier on. According to US job-hunt website Zippia, the average person in 2023 will have 12 jobs in their lifetime; Investec Click & Collect came up with a figure of six jobs for the average British worker in 2017, and 12 for millennials in the first decade or so of their careers.

• Invest with ii: What is a SIPP? | Is a SIPP right for me? | SIPP Cashback Offers

But each employer has its own pension scheme, so it’s easy to see how people might lose track of old pension pots in the course of repeated job changes. And the issue has been exacerbated by the introduction in 2012 of auto enrolment, which has pulled most of the working population into pension saving.

House moves are another factor fuelling mislaid pensions. Research from the Association of British Insurers (ABI) found that only 4% of people think to tell their pension provider when their address changes, compared with 66% who inform their bank.

So, how bad is the problem? The latest study from the Pension Policy Institute (PPI) indicates that in 2022, pension providers were not currently in contact with scheme members in the case of almost three million ‘lost’ pots worth a meaty £26.2 billion in total.

Alarmingly, both those figures have increased substantially since the PPI’s previous research in 2018, when providers had lost touch with the owners of 1.6 million pots worth £19.4 billion.

• Seven pension changes everyone must know about
• Will the state pension exist when you retire?

Hetty Hughes, manager of long-term savings policy at the ABI (which sponsored the PPI research), points to “job churn from the pandemic and an increase in people moving house” as the main drivers behind this rise.

The average lost pension is now worth almost £9,500 – but for older people aged 55 to 75 it’s over £16,000. Clearly, every chunk of pension that gets lost on the journey to retirement will impact to some extent on the ability to live comfortably thereafter.

So, what can you do to ensure you can account for every penny of your retirement savings?

Tracking down old pensions

If you think you might have lost a pension in the course of your working life, you should contact your former employer, or the pension provider if you can remember it.

However, according to Chris Flower, a financial planner at Quilter, this may involve challenges: “The company may have changed names, merged, changed ownership or transferred its assets to other life companies. If you don’t have any up-to-date information, then a google search can be a simple place to start.”

Otherwise, the government’s Pension Tracing Service (PTS) may be able to help trace your pension. As Alice Guy, head of pensions at interactive investor, points out: “The PTS has a database of over 200,000 workplace and personal pension schemes and can help you find lost details.”

Why consolidate?

Once you’ve located lost pensions and rounded up any others, in most cases (although not all, as we’ll see), it makes a lot of sense to go through the process of consolidating them, which involves bringing them all under one roof and reinvesting them into a single fund or portfolio.

For self-directed investors, that typically means bringing them into a self-invested personal pension (SIPP) on an investment platform such as interactive investor.

There are numerous benefits. Apart from the fact that you won’t lose track of waifs and strays when they are consolidated, administration becomes much simpler, as you can see the total value of your aggregated retirement pot, manage it more easily, and get a clear view of how much income it might generate down the line.

• Six ideas for a core holding in your pension fund
• 8 things you must know about building a retirement portfolio

You’ll also be paying one simple transparent charge for the whole lot. Moreover, some providers charge a flat fee or a lower amount for larger balances. “Charges vary significant between providers, with percentage fees often being poorer value for those with bigger pension pots,” Guy notes.

There may also be special offers available. For instance, at interactive investor, the monthly SIPP fee is currently waived for six months for SIPP accounts opened before 31 August 2023, while pension transfers of £10,000 or more started before 31 August 2023 qualify for cashback awards of between £100 and £3,000.

Flower adds that it’s also easier to ensure consistency in your investment when your pensions are all together. Moreover, if you have many different investment funds with different providers there’s the risk of “investment overlap, resulting in over-diversification or larger positions in certain assets, sectors or individual company holdings than would be recommended”.

A further consideration is that older pension plans are likely to have high fees, opaque charging structures and limited investment choice.

Finally, says Flower, those set up before pension freedoms were introduced in 2015 “cannot always take advantage of the most up-to-date rules on accessing your pension flexibly (drawdown) and flexible death benefits (nominee and successor drawdown for example).”

What to be aware of

Consolidation isn’t always the best way forward for all your old pensions, however. Most obviously, final salary and career average salary (defined benefit or DB) pensions provide the security of a guaranteed inflation-linked income and death benefits for a surviving partner that make them extremely desirable compared with investment-based (defined contribution or DC) pensions.

If the transfer value of a DB pension exceeds £30,000 you are legally required to take financial advice. “The Financial Conduct Authority (FCA) and the Pensions Regulator believe it's in most people's best interests to keep their DB pension,” comments Flower.

Guy points out that it’s important to check the fine print regarding terms and conditions for DC pensions too. “Older pensions may contain great guarantees such as survivor benefits or inflation guarantees, which could be more valuable to you than they first appear.”

• Six tips to retire using your ISA investments
• 10 things to know about running a retirement portfolio

Other legacy benefits could include generous guaranteed annuity rates, a higher rate of tax-free cash than the usual 25%, or a protected low retirement age. “If you move to a scheme that does not protect these, you will lose them,” warns Flower.

Cost is another issue. Some pension schemes have punitive exit fees, which may mean you’re better off sticking with your current scheme, depending on the size of your fund or fees.

“Exit fees are capped at 1% of the value of a pension for those aged over 55 (57 from 2028). Providers are banned from increasing the exit fees of policies where the exit fee is currently less than 1%, and there is a complete ban on charging exit fees on pensions set up on or after 31 March 2017,” Flower explains.

Finally, people who are still in work but want to top up their earnings with pension might usefully be able to use existing small pensions rather than consolidating. Flower notes that those worth under £10,000 have special rules attached, which allow you to access them without triggering the so-called money purchase annual allowance (MPAA) that cuts the annual limit on further pension contributions.

So how do you go about consolidating?

There’s no escaping the fact that it can be a bit of a chore if you take the DIY route. You’ll need to identify your new pension provider, dig out your paperwork, initiate a transfer and fill in the forms requested by the provider.

The length of time it takes for the transfer to go through depends on your provider and the kind of transfer you choose. “If you transfer your pension to interactive investor, it usually takes between two and six weeks to complete cash transfers,” says Guy.

“If you want to keep your existing investments to avoid being out of the market, it usually takes slightly longer – between eight and 12 weeks, depending on the type of investments you hold.”

If you take professional advice, says Flower, the IFA will review your current financial situation, objectives and existing pensions. “This will result in a recommendation based on the pensions you hold, what is available in the market and the impact of fees. If you are at or in retirement, it will include finding a pension appropriate for your income needs,” he explains.

Either way, be sure you understand the additional costs attached to consolidation, which include IFA fees (if you take advice), platform or provider initial and ongoing charges, and those for the investments themselves.

Clearly, consolidating your old pensions is in many cases a great idea. Despite the initial hassle, it can save you a lot of time, effort and cost over the years, and could improve your investment returns too. But particularly if you hold a range of older pensions, this is one situation where taking professional advice could be a sound move.