This content is for information and inspiration purposes only. It should not be taken as financial advice. To receive regulated, bespoke financial advice regarding your situation and goals, please consult an independent financial adviser.
Most people in the UK nowadays are likely to have careers spanning 40+ years, changing jobs at least 10 times before retirement. This is a markedly different picture from the employment landscape in the 1950s, for instance, where it was common for people to stick with one employer throughout their life, eventually leaving with a single, large retirement pot.
Today’s workforce is much more mobile and lifespans have increased significantly. This is not necessarily a bad development, yet one interesting result is that many people now have multiple, smaller pension pots accrued during their different jobs. In some cases, our financial advisers here at Cedar House have sometimes assisted clients with ten or more pension pots!
Naturally, trying to organise ten pension pots for your retirement is likely to be much more complicated than trying to manage one. Therefore, it isn’t unusual for people to ask our financial advisers: “Can I combine my pension pots in some way, and is this a good idea?”
What follows is an answer to that question. Please note that everyone’s financial goals and circumstances are different. So, combining multiple pension pots might be a good idea for some people, but not a sensible course of action in others. Consult a professional financial adviser if you are considering the future structure of your pension pots.
Combining Different Types of Pension
It’s common for people to assume that they only have one pension; or if they have multiple pensions, that they are all broadly the same. As already mentioned, it’s now more common to have multiple pensions. However, each one is also likely to be set up differently.
Broadly speaking, there are two main pension types: defined benefit and defined contribution. With the first type, your employer agrees to pay you a “retirement salary” when you eventually retire, for the rest of your life. The amount you get is usually determined by factors such as your “accrual rate”, your years of service and your salary during your time of employment.
The second type (defined contribution) works differently. Rather than promising you a retirement salary, both you and your employer regularly contribute to a pension pot which you will one day use to generate a retirement income. If you have a private (or personal) pension, then you will likely also build up a pension pot in a similar fashion, except your employer is unlikely to also contribute to this.
As you might have already started to see, combining two defined contribution pots is likely to be much more straightforward than bringing a defined contribution and a defined benefit pension into one pension pot. In the former case, you are combining two broadly-similar pensions (even if the pension schemes are likely to be set up differently).
To combine a defined benefit pension with a defined contribution pension, however, you will need to consider transferring the benefits of the former into a cash lump sum. This is a delicate and complex process, with significant implications for your retirement income. So you should not attempt to take this decision lightly or do it yourself. Make sure you speak with an experienced, independent financial adviser who specialises in pension transfers.
Fees & Costs
Combining pension pots is, unfortunately, not as simple as moving money from one regular savings account to another one. Quite a lot of paperwork is involved, as your financial adviser speaks to your various scheme providers to ascertain the information you need, and follow the formal process of leaving a scheme.
It’s important to note that some pension schemes will charge you an “exit fee” for leaving. In some cases, the costs of leaving can still be worth it, but it depends on the circumstances. For instance, if the scheme has quite high management fees which eat into your investment returns, then over time you might still end up with large savings if you move to a lower-cost scheme.
Bear in mind that if you leave a scheme, you also forsake its benefits. It’s important to be fully aware of these benefits with your financial adviser, before making any decision to leave the scheme. Defined benefit schemes, in particular, can often present members with “gold plated” benefits which are hard (if not impossible) to replicate elsewhere (e.g. a guaranteed, inflation-linked retirement income for the rest of your life).
So far, it might sound like we are quite negative about the idea of combining different pension pots. However, that is far from the case. For many people, bringing multiple pension pots together under one roof is a very sensible option, offering lower administrative costs as well as greater ease of access and management going forwards.
If you combine your pensions into a single SIPP (Self-Invested Personal Pension), moreover, then you often also gain much greater control over where your pension money is invested. This also helps to guarantee that you can start accessing your pension money from the age of 55 if you wanted to. Some workplace pension schemes will not allow you to access all of your scheme’s benefits from this age, which can make switching providers an attractive option.
Regarding combining different pension pots, some people ask: “Isn’t it dangerous to put all my eggs in one basket when it comes to my retirement funds?” It can seem logical to think that by keeping your pension money in different pots, then you are “spreading out your risk” in the event something unfortunate happened to one of them.
However, remember that the UK’s pension rules ensure that your pension pots are kept separate from the fortunes of your employer. If the latter goes bust, for instance, then under the law your funds are protected from being affected.
Whether or not you choose to combine your different pension pots, your money is still subject to the natural volatility of the financial markets. Wherever your money is situated, you should ensure that your investments are appropriately diversified according to your goals and risk tolerance, and kept protected from unnecessary risks.