Is consolidating old pension pots worth it in 2022?

This article explores whether pension consolidation is a viable option, and looks at some of the advantages and disadvantages of consolidating.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Retirement saving and pension planning

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The New Year got off to a rocky start. The energy crisis is looming and the average UK household is at risk of a big financial squeeze. To add to this, Omicron continues to widen the labour shortage crisis, while the cost of living is expected to continue to rise in early 2022. However, it is not all doom and gloom. There are currently more vacancies than ever before, according to the ONS latest labour market overview. This presents jobseekers with a rare opportunity to leverage their skills in search of better working conditions. For the lucky ones, starting a new job will usually result in changing their pension provider and having one more pot to worry about. Let’s look at whether consolidating pension pots is something to consider this year. 

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What is pension consolidation? 

Let’s face it, if you have been in the labour market for a while, the chances are that you have changed jobs over the years. In an attempt to get people to save for retirement, the government introduced pension auto-enrolment in 2012. And currently, employers are obliged to enrol employees into a workplace pension scheme.

So, nowadays, it’s actually pretty common for people to have several pension pots from different schemes. Having multiple pots could prove to be an issue, which is why both the industry and the regulators are considering it. So in layman’s terms, consolidating or transferring pensions is basically combining your pots under a single roof. 

I wish that it was that simple. However, there are aspects that you need to consider before consolidating old pension pots together. But making the most out of your pension could be the key to a happier retirement. In fact, getting it right early on could result in a better-performing pot that could secure you a higher income in retirement – or an earlier retirement altogether, if that is what you are after. So, before progressing with the pot transfer, it is key to understand whether this fits your retirement goals.

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The advantages of consolidating old pensions 

  • Having one provider makes it a lot easier to track how your pension pot is performing. And this could make retirement planning a lot simpler, as you know the total size of your pot and how well it is performing. 
  • Putting your money into a new scheme that charges lower fees than an older plan could result in a better performing pot. 
  • A self-invested personal pension (SIPP), is a great alternative if you want greater control over where your pot is being invested. It also offers a greater range of investment choices without the higher charges. 

What about the disadvantages?

  • Not realising the type of scheme you are in is a major disadvantage. If you are lucky to be on a defined benefit (or final salary) scheme, it’s probably wise to leave your pot in peace. This is because you are guaranteed an income in retirement without the need to make a decision based on the size of the pot.  
  • Before transferring a pension to a different provider, make sure that there are no exit penalties that could cancel out the benefits. If overlooked, exit penalties could seriously deplete the size of the pot. 
  • Make sure that transferring to a new provider won’t result in the loss of special features. Some schemes offer their customers features like early access, more than 25% tax-free cash or guaranteed rates if you decide to take an annuity. 

Where can you get advice?

According to the gov.uk website, when it comes to consolidating pension pots, everyone could get free and impartial advice from:

Another option, though not a free one, is to contact an independent financial adviser. 

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