20 August 2022
With most people starting a new pension every time they start a new job, millions of people are likely to reach retirement with multiple pension pots. They may already be receiving multiple communications from different pension providers and be aware that they have several pensions, and the advent of the pensions dashboard will mean that people can readily see in one place all of their different pensions. This is likely to provide further impetus to the growing drive to consolidate pensions into a single pot.
There are many advantages to consolidating DC pensions but also some risks in doing so. A new paper from LCP – “Five reasons to consolidate your DC pensions – and five reasons to be careful” – provides a balanced guide for consumers so that they understand the pros and cons before rushing into consolidation.
The paper, jointly written by LCP partners Dan Mikulskis and Steve Webb, starts off by setting out some of the positive reasons for reviewing your pensions and consolidating them into a more modern, and often lower cost, arrangement. These include:
- Lower charges – many pensions taken out before automatic enrolment will have much higher charges than charge-capped pensions under AE; LCP calculate that even moving lifetime savings from a fund charging 1% to one charging 0.75% could result in a fund nearly £25,000 larger for someone on average earnings who contributes each year; even larger savings are attainable if the money is consolidated into a modern pot charging well below the charge cap;
- Rationalising your investment strategy – with scattered pots, it is almost impossible to be clear how your money is invested and to ensure you have the right level of risk and return for your individual situation;
- Benefiting from the latest investment innovations – many old pots may be invested with a UK bias or may not take advantage of asset classes which have become more mainstream in recent years;
But the guide also highlights the fact that there may be reasons to be careful before moving pension pots around. These include:
- Giving up valuable product features of old pensions, including ‘guaranteed annuity rates’ (GARs), which promise an often attractive annuity rate compared with current market rates – a feature which may be lost on transfer;
- Giving up ‘small pot privileges’ such as the ability to access pots under £10,000 without triggering the ‘Money Purchase Annual Allowance’ – a tight limit on tax-relieved future pension saving;
- Giving up on other ‘protected’ features of your old pension, such as the ability to access it before the proposed normal minimum pension age of 57 by 2028;
Commenting, report author and LCP partner Dan Mikulskis said: “From an investment point of view, your mix between growth assets and stable assets is likely to the biggest driver of your investment returns. But it is very hard to have the right strategy – to get this mix right - if your money is scattered across lots of different pensions, all with their own approach to investing your money. Consolidating can also dramatically reduce your costs, with old ‘legacy’ pensions often charging at least twice as much as more modern arrangements. Switching to low cost funds can add tens of thousands of pounds to your final pension pot at retirement”.
LCP partner and co-author Steve Webb added: “Despite the attractions of pension consolidation, it is important to ‘look before you leap’. Pension products may have attractive features which can be lost if you transfer out as an individual. This could include access to more tax free cash, guarantees on the annuity rate you can secure, or even the right to access your pension at a certain age. Before consolidating you should make sure you know what you are giving up and weigh up the pros and cons before doing so”.
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Notes to editors:
- LCP’s new ‘On Point’ paper by Dan Mikulskis and Steve Webb is called “Five reasons to consolidate your DC pensions – and five reasons to be careful” and is available here.
- The five advantages of consolidation explained in the paper are:
- Potential to pay lower charges
- Rationalising your overall investment strategy
- Not missing out on innovations in investment approaches
- Better value when buying an annuity
- Easier to manage and engage with your pensions
- The five potential disadvantages of consolidation explained in the paper are
- Loss of Guaranteed Annuity Rates
- Loss of ‘small pot privileges’
- Loss of tax protections, including tax free cash percentage and age of access
- Risk of exit charges
- Lack of diversification (of provider / manager).