A Government plan to simplify pension management by combining pots worth £1,000 or less into a single scheme was announced this week – but you do not have to wait to start consolidating your own retirement savings.
According to the Department for Work and Pensions (DWP), small pension pots of £1,000 or under now number 13 million.
In every job you have, you will be enrolled into a different pension scheme, so if you have worked in a large number of roles for a short period, you will likely have lots of different pots, each very small.
Under the new proposed changes, these small pots will be automatically consolidated into a single pension scheme managed by authorised workplace pension providers.
However, ex-pensions minister Sir Steve Webb has estimated that the plans are unlikely to take effect until at least 2030, which means it will be years before savers feel the benefits.
So, if you do not want to wait five years or more, here is what you can do now.
The first step to combining your pension pots is to find your old pensions, and the starting point for this is listing your old employers and finding out which pension schemes they paid into.
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If you have old paperwork from your employers, check these for details of your pension scheme.
Most pension schemes will send you a yearly statement, so check if you have these.
You could also contact your old employers to ask or use the Government’s pension tracing service.Once you have found the provider, contact them with as much information as you can to help find the pension you might have.
These might include telling them the date you worked in your job and your national insurance (NI) number.
How to combine them
Once you have found your old pensions, you can choose where to put the pots you want to consolidate.
There are various options, including moving them all into a pot with your current workplace provider or into a self-invested personal pension (Sipp).
Certain companies – such as PensionBee – also provide a service that combines pension pots into one.
You can do this all yourself, or if you would like advice on the best course of action, you could consult a financial advisor.
It is not necessarily always the right choice to combine all your pension pots into one set of savings. There are pros and cons of each decision.
Pros
Makes it easier to keep track of things. Small pots “are easily forgotten,” according to Rachel Vahey, head of public policy at AJ Bell, so combining them may reduce the chance of this happening. Combining your pensions could cut your costs. “You might be able to get a better deal from another provider. Some pension providers offer better charges the more you have with them,” explains MoneyHelper, a website that provides impartial guidance backed by the Government.Cons
There is a potential risk the fees could actually be higher. Under a rule that came in back in 2015, your provider cannot charge you more than 0.75 per cent if you are in a default fund that you were auto-enrolled in by your employer, but if you take active decisions or have an older pension, the charges may be higher. You may miss out on small pot lump sum advantages. Most people are able to take 25 per cent of their pension pot tax-free when they retire – up to a total of £268,275. But something known as the “small pots rule” states that if you access the whole of a small pension plan worth up to £10,000 as a small lump sum, you can receive up to 25 per cent of it tax-free, and the lump sum will not count towards your lump sum allowance. You can take up to three small non-occupational pensions, such as self-invested personal pensions, but there is no limit on the number of occupational pots that you may have. You could lose hidden benefits when you transfer. Some pension schemes come with what is known as “safeguarded” or “flexible” benefits, such as a guaranteed annuity rate (GAR), which can provide guarantees about the income you will receive in retirement. Nick Flynn, sales director – retirement at Canada Life, an annuity provider, has recommended “asking for a transfer value statement and going through it line by line.” Check if you are transferring a defined benefit pension. Instead of being a pension pot, these types of pensions offer a guaranteed annual income for life in retirement. “Though there are limited examples where you might want to, I think in most cases transferring a DB pension is not something that would be recommended,” according to Craig Rickman of interactive investor.. Read More Details
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