One of Maji’s most frequently asked questions is ‘should I consolidate my pension?’. It’s a term you might have seen in your finance research, or maybe in an advert from a pension provider. But is this something you should be considering?
The short answer is: maybe!
In this blog series, we’ll be telling you what consolidation actually means, what you need to consider before you commit to it, and how to carry out the process. It’s a popular choice that could save you time and energy – but make sure you watch out for some of the pitfalls.
What does consolidating my pension mean?
You may have several different pension pots that you have saved into over time, for example if you have worked for different employers. Consolidating your pension pots means combining them into fewer pots, or even just one. The pot you choose to consolidate into could be a scheme you already have (such as your current workplace pension), or a new scheme you take out. It doesn’t need to be a scheme specially designed for consolidation.
What might be the advantages of consolidating my pension?
Moving your pensions into one pot can solve a range of problems:
- Easier management: you’ll be able to see your whole pension in one pot, which might make it easier to monitor, track and understand how much will be available when you retire.
- Simpler administration: you’ll only need to liaise with one pension provider, which can save time if you need to update your details or make changes to your investments.
- Lower charges: depending on the scheme you choose, you may be able to lower the fees and charges from what you are paying across your various pension pots. For example, you may be able to transfer from a pension with higher fees to one with lower fees; or, you may be able to take advantage of discounts on fees for higher value pension pots by putting all your money in one place.
- More retirement options: If you have an older pension from before 2015, when new rules about how you could take your pension, known as Pension Freedoms, came into place, you might benefit from transferring into a newer pension scheme with more flexibility about how you can access your money.
What might be the disadvantages of consolidating my pension?
Though consolidating your pension may seems attractive, it’s really important to think about this move carefully, as there could be some downsides:
- A worse deal: Some pension schemes will leave you with more money at the end of the day than others; for example, the funds might do better or the charges might be lower. These differences can have a huge impact on the size of your pension pot. This risk is particularly significant if you are thinking of consolidating a Defined Benefit (DB) scheme: you run the risk of losing your guaranteed income if you move your money. For this reason, you are required to seek financial advice if you are looking to transfer out of a DB pension worth more than £30,000. We actually recommend that you never consolidate any DB pension without taking advice.
- More paperwork: Every time you get a new employer, you will get a new pension account, so to keep your pensions consolidated, you will need to repeat the consolidation process every time you leave a job.
- Additional fees: some pension schemes charge an exit fee when you transfer your money out of and into another scheme. Exit fees are capped if you are close to retirement, but earlier in your career, you may need to weigh up potentially saving on ongoing charges (and the time you have left to do so) but incurring an exit fee when you move your pensions.
- Lost savings allowance: When you start withdrawing cash from a Defined Contribution pension after the age of 55, it changes how much you are allowed to save back into your pension (sometimes called Money Purchase Annual Allowance, or MPAA). However, if you fully cash in small pots worth less than £10,000 (up to three non-occupational DC schemes), the amount you can withdraw after 55 is unaffected.
- Lost tax-free allowance: there is a limit to how much money you are allowed to save into your pension tax free over your lifetime. When you withdraw money from your pension after 55, your lifetime allowance is reduced by the same amount. However, up to three small pension pots (no more than £10,000 each) may also be withdrawn in addition, without affecting your lifetime tax-free saving allowance. Combining these smaller pots into a larger one may mean that you hit the lifetime allowance and miss out on the extra £30,000 you could withdraw tax-free.
- Lost benefits: Additionally, you may have further benefits which you might lose if you transfer out of your pension pots. Make sure you check the terms and conditions for each of your existing schemes or ask your pension providers whether there are any benefits specific to your scheme that you’ll lose if you transfer.
- Lost early pension access: The government is raising the age at which you can access your money (to 57 in 2028). However, the government is currently reviewing proposals for protected access. This may mean that if you already have a pension with an existing right (written into the scheme rules) to access your money at 55, you may be able to retain your earlier access date. If you are absolutely certain you would like to have some of your money at 55, you may want to keep hold of your pension pot depending on what your scheme rules say.
So, should I consolidate my pension?
There’s no easy answer! You’ll need to check what kind of pensions you have, and what benefits you are entitled to, before making a decision. And, if in doubt, remember you can seek financial advice.
How can Maji help me manage my pension?
With Maji, you’ll be able to log and track your different pension pots, including those from previous employers and any personal pensions you also have. So, you’ll be able to get an overview of your savings whether you decide to consolidate or not. You can also access coaching and advice from our Maji Money Heroes, a team of money heroes available to help you with all your financial queries.
Get in touch with us to find out more about how to get access to a Maji account through your workplace.