What to consider when consolidating your pensions?

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Pension consolidation is such a popular topic when it comes to retirement planning because it could save you money and make it easier to manage your pension savings more effectively.

Pension consolidation simply means reducing the number of pensions you’ve got and our research shows that four out of five customers have more than one.

You might, for example, have set up a personal pension plan and then joined the workplace scheme offered by your employer. If you changed jobs and joined the workplace scheme at your new firm, you’d now be a member of three different schemes so it’s easy to see how they can add up.

By consolidating your pension savings into a single plan you could save money on charges and make it easier to manage the performance of your savings. 

Work out exactly what pensions you’ve got 

When it comes to consolidation the first thing you need to do is make a list of the different pensions you have. If you don’t have complete records then you should contact the pension tracing service to track down a previous workplace scheme or The Pensions Advisory Service to help find the details of a personal pension scheme.  

Once you’ve sorted out the paperwork you’ll then have to decide whether you want to transfer all of your pension savings into one of your existing plans or whether you want to set up a new plan.

To do this you’ll need to look at the charges you’re paying in each plan, identify any exit fees and understand what protected or valuable benefits you’d be giving up by leaving. We appreciate there are lots of factors to consider so if you’re not confident about carrying out a full comparison then a financial adviser will be able to help you. Alternatively, you can contact our team of experts, Aegon Assist for free guidance. 

Transferring out of a defined benefit (final salary) plan

If you’re a member of a defined benefit (final salary) scheme then you won’t be able to transfer the actual benefits you’re entitled to. Instead you’ll get a cash equivalent transfer value (CETV) and this amount of money can then be moved into a new plan.

If you’re transferring to a new defined benefits plan then the CETV will be used to buy benefits as per the rules of the new scheme, although it’s unlikely they’ll be exactly the same as you had previously. However, few defined benefits schemes will accept inward transfers and it’s more likely you’ll be transferring into a defined contribution scheme.

When transferring into a defined contribution scheme the CETV will be the amount of money that’s put into your new pension pot. Legislation introduced in April 2015 demands that you get financial advice before transferring out of a defined benefit scheme if the CETV is £30,000 or above. This is because the retirement income you’ll get from a defined benefit scheme is guaranteed.

In contrast the level of retirement income you’ll be able to generate from savings in a defined contribution scheme is not guaranteed. It depends on how big your pension pot is and this’ll be determined by where you’ve invested your pension savings and how well they’ve performed. However, a defined contribution scheme will offer more flexibility in terms of how you can generate your retirement income.

Transferring out of a defined contribution scheme 

If you’re transferring from one defined contribution scheme to another, you’ll have to make sure your new scheme offers the best value in terms of charges and check that you’re not giving up any protected benefits such as guaranteed annuity rates or protected tax-free cash rights. Transferring may not be right for you, if you’re uncertain then get advice from a financial adviser. As with all investments remember that what you get back depends on several things, for example how your investments perform and how they are taxed, and you may get back less than you invested.

If you decide to go ahead, it should take your provider around 4 weeks to complete the transfer. Once you’ve consolidated your pensions it’ll be easier to see your total pension savings and where they’re invested. You could also reduce the charges you’re paying and so make it easier to build up a bigger pension pot.

Instead of sticking with multiple pensions, it’s time to get in touch with your providers and ask them to send you details of the charges you’re paying.

Armed with this information you’ll be able to identify the most expensive plans, compare alternatives online, and begin the consolidation process to a lower cost pension.

But remember, the longer you wait, the longer you’ll be paying more than you need to, and that just doesn’t make sense when every penny counts.