Lost the pot: the pros and cons for employees consolidating their pension plans

A few questions anyone considering consolidating their pensions needs to ask themselves

The Association of British Insurers estimates that 1.6 million pension pots are sitting unclaimed because they’ve been simply lost or forgotten about. With the average person having 11 jobs in their lifetime, with potentially several pensions with different providers, this is hardly surprising.

Consolidating pensions into one pot is something that many may want to consider.

But there are key questions employees need to consider before consolidating their pensions.

When is it a good idea for someone to consolidate their pensions?

A: Consolidating pensions into one pension pot can make it easier for someone to manage their finances, rather than having to check the performance of multiple accounts and could save them money on fees.

It may make sense for employees to consolidate if they have several schemes and struggle to keep track of them all, or if they have different investment strategies which are not joined up or aligned to the amount of risk they are prepared to take. Employees approaching retirement may also want to consider it if their other pension schemes are not as accessible as they would like.

Pension Dashboards, when they are introduced, will help provide transparency and allow individuals to track their schemes more easily, but there will still be the same issue of not having a joined-up investment strategy.

What are the risks?

A: It’s important for employees to consider if there are enhanced features or protections that could be lost by transferring a pension to an alternative arrangement. These could include a protected pension age, enhanced tax free cash or guaranteed annuity rates. Depending on the benefits an existing pension offers, in some cases individuals would be required to seek regulated advice before proceeding with a transfer.

Also employees should check if the scheme(s) offers any useful services such as financial education, guidance or ongoing regulated financial advice, the option to take income drawdown, on-line access, the choice of investment options available and the number of investments available on the platform.

Employees also need to realise that there is no guarantee the performance of the investments held in an alternative pension will be better than where they are already. It is important to look at the investment options available in the pension arrangement before making a transfer. Simple offerings with limited investment choice may not provide the investment options that best suit an employee’s needs. They should also be vigilant of scams.

How does an employee go about it and how much does it cost?

A: To consolidate their pensions, employees should get in touch with the pension provider they intend to transfer into. This could be their current workplace pension scheme, or another pension arrangement they have set up privately. The provider will ask for details including the policy numbers and provider names of all the pensions an employee is wanting to consolidate. This information will be available on their paperwork and statements. The pension scheme they have chosen to transfer into will then begin the process of arranging for all their pensions to be transferred into one plan.

If an employee is changing jobs, it is important that they know not to transfer their existing pension until they have left, to ensure they receive all their employer contributions.

The costs can vary but could include charges for advice, setting up the new scheme, platform charges, dealing and transactional charges (including those to access funds via drawdown) and investment management charges. However by bringing all pensions together, an employee may reduce some of these charges as some providers charge a lower percentage the more that is invested.

It’s important to note that if an employee has a defined benefit (DB) pension, a pension transfer to a defined contribution scheme is a complicated financial decision and is unlikely to be suitable for the majority of DB pension members. Those interested in considering this option would be required to seek regulated financial advice at their own cost if the transfer value is greater than £30,000.

Some pension consolidations are taking a long time. What is causing the delay?

A: The time it takes to transfer a pension depends on the method different providers use. Some still send paperwork through the post, which can be much slower than secure electronic methods.

Also, in November 2021 new measures were put into place to protect pension savers from scams which means that providers are now able to flag or block transfers which show signs of a potential scam.

Some providers have been criticised for delaying legitimate transfers, but they claim that they are legally required to flag anything which breaches these criteria and pause the transfer until further clarification is provided.

To prevent the transfer being flagged, it is important that as much information as possible is provided to reassure the provider that it is a legitimate transfer.