152- Should You Consolidate Your Pensions?

In this episode, Benjamin explains why you shouldn't automatically transfer and consolidate your pensions.

There can be benefits in doing so, but you need to first understand what you may potentially be losing out on or giving up. Understanding that will give you the confidence that you're making the right financial decision and avoiding any financial mistakes in consolidation. 

By the end of this episode, you'll understand what you need to be thinking about and some of the questions you need to ask of your existing pension providers before pressing 'consolidate'. 

Knowledge is power, money nerds. 

Join Benjamin Mitchell (themoneyscot), serial hater of financial jargon, as he helps make your finances clearer and ensures you never make another financial mistake.

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Disclaimer - please note that nothing in this podcast can be relied upon as financial advice and the content is provided purely for information and guidance purposes. Please seek independent, regulated financial advice relevant to your situation.

Transcript

SPEAKER_00 0:09

Hi money nerds and welcome to Heads Up on Money. This is episode 152, and it's an important episode. It's actually one I can't believe I've never covered before on Heads Up on Money. I'm talking about should you consolidate your pensions? For ease, for any other reason, is it just sensible planning rather than having all your pensions scattered all around the place? Should you just consolidate them? Well, I'm going to go into the pros and cons in this very episode of Heads Up on Money, and hopefully by the end, you should be armed with the knowledge to do this yourself if you are your own financial planner, and as many Heads Up on Money listeners indeed are. So let's get into this one without further ado, as it's due to be a slightly longer one. I'm gonna try and not get bogged down into the weeds of this, because there's lots of ways I could take this episode, but I will try and rein that in as much as I can. So let's get into it. Episode 152, should you consolidate your pensions? So the question around should you consolidate your pensions, it really came to me recently when I was reading something about the upcoming changes to pensions and inheritance tax, which is due to come into effect next year. Now I'm not going to get into that in this episode. I've done previous episodes of Heads Up on Money talking about the changes to how pensions are dealt with and how for most people who may have not been under the net of inheritance tax before may now in fact have sizable liabilities on their personal balance sheet. Again, please do read and educate yourself on this. I've got tons of resources on my website and in previous episodes of the podcast if you're not already armed with that knowledge. There are some fairly significant changes coming down the line with regards to pensions and inheritance tax. But one of the possible reasons why people are consolidating pensions at the moment is almost as an administrative task to save future generations a headache. And what I mean by that is there's still a lot to come out in the wash regarding the actual practicalities of how pension schemes will potentially settle inheritance tax liabilities when this all changes next year. But the headlines really that you should be aware of, money nerds, is whereas before your inheritance tax liability would obviously have been settled by your estate before the residual amount of your estate can be passed to your loved ones, your nearest and dearest. Well, now that pensions may have responsibility as part of that inheritance tax charge, there is potential for the actual pension scheme to pay their share of the inheritance tax liability, if that makes sense. Now, how that works, again, out with this episode, and there's still a lot to be confirmed, it's not certain money nerds, but a lot of people are saying if I've got six or seven workplace pensions amassed over my life, and each of them is going to be responsible for a share of an inheritance tax charge, you can see it's quickly going to become an administrative nightmare for your executors who are responsible for dealing with and administering the state on your passing. So some people who perhaps are in later life and thinking about inheritance tax and pensions are just consolidating all their pensions into one pension so that if for no other reason it provides greater administrative ease for their loved ones. Now, whether or not that is a pragmatic step to take, obviously I cannot comment because we would need to know the ins and outs of those pension schemes that they hold, if there's any reasons why they shouldn't be transferring them and consolidating them into another scheme. But generally speaking, from an inheritance tax planning angle and a simplicity angle, you can see strong rationale for doing that. But the broader question as to whether or not you should consolidate your pensions applies not just to people who are at that stage of life and really thinking about inheritance tax and more thinking about the next generation rather than themselves. It applies throughout everyone's financial lives, arguably. As soon as you start collecting and amassing pension wealth, which as a result of auto-enrollment, many, many more of us should now than were in the past, you start to naturally over the course of life, you start to build up various pension pots over the course of your career. And most people that I sit down with will have a variety of pensions that they've just left ticking along because they've moved from one employer to the other, and life gets in the way, and that's low down your priority list when you move jobs, is whilst you can potentially consolidate existing pension wealth into your new workplace pension wealth, or arguably consolidate them all into a private pension, personal pension SIP. We're not going to get into the new shy in this episode. The bottom line is we amass fairly significant numbers of pensions over our working career. And it can be easy to lose track of them for one thing, and for many people, they just prefer that peace of mind and the tidiness factor of consolidating them, keeping them all together. And I get that because it's much easier to know if you have one pension and it's on an investment platform, say, and you log in and it's worth £477,000, for instance. You know that that is your pension wealth, and if that goes up, that goes down, you've got to stock a measure of how much your retirement pot is, or whatever you plan to use your pension for. When you've got various pensions with various providers tied to workplaces of old, it becomes quite disconnected and a bit confusing. And in some cases, I've seen this become quite disengaging for your financial plan because you've got no real idea of what you're worth. Let's just call it what it is. You've got no idea how much you've got at your disposal, and as a result, you then fail to answer the most pressing financial questions in our lives in terms of do you have enough and what do you need to get you there? All of the stuff we talk about in our financial plans. So I'm going to try and bring this question to life in this episode 152 of Heads Up on Money and talk through some of the things you should be thinking about around that decision of whether or not you should consolidate your pensions. Now, obviously, disclaimer, I'm not giving financial advice here. As always is the case with Heads Up on Money. This is just a guidance podcast. I cannot give one-to-one bespoke financial advice. If you want financial advice, you would need to reach out to me directly to advise you as a client. But failing that, this episode is really just there to give you the grounding, a sounding board for you hopefully to make better financial decisions and avoid some costly financial mistakes. So merging pensions, it may not always be the right move, and I'll come on to why that is later in the show. But first of all, talking about what does pension consolidation actually mean? So, consolidation, as the name suggests, bring means typically bringing two or more of your pension pots together into one place. So you would typically be transferring, let's say you've got a couple of pensions from workplaces of old, let's say you worked for ABC Manufacturing Limited and DEF Logistics Limited. Each of them may have had a group personal pension scheme set up for you. Let's say the first one was for argument's sake, standard life, the second one was Aviva, and beyond that, you may have your own personal pension that you've set up when you were younger, say, and that's got 40 grand in it. And you're now saying, Okay, should I just transfer my standard life and Aviva plans into my private pension plan? Should I have them all under one roof? And the means in which you can transfer them typically is what's called a cash transfer or an in-specie transfer, which sounds a lot of gobbledygook, but all that means is a cash transfer means any existing investments you held in those transferring schemes will be sold to cash first of all, and then transferred over, or an in-specie transfer means that your investments that you're invested in, so for instance, funds that held stocks or shares or bonds, depending on your risk appetite, would be moved across without being sold. So obviously, the merit to that is that you remain in the market. Now that is one such merit, but from an administrative angle, you're often far easier to do a cash transfer. And I'm not getting into the area of financial advice here when I say that when I do these transfers for clients I'm working with, we would nearly always do things as a cash transfer because it facilitates a much more speedy transfer than doing things in specie, and more often than not, the actual funds that clients who come to me are invested in are probably not in the best place anyway, compared with the solution that we're looking to put in place. So, generally speaking, to facilitate a speedier and less painful transfer, most people would go down the route of a cash transfer. And of course, the the downside with a cash transfer is you may mean you're out of the market for some time, but fortunately the time frames on these transfers have come down and down over the years since I've worked in personal finances, it's a lot rosier than it once was. There's horror stories you used to hear in the past of transfers taking up to six months when you did an in-specie transfer, but in the era now of the consumer duty legislation which is in place and regulating all personal finance firms, including advisors like me and investors, pension providers, is treating customers with the utmost care and attention and ensuring they have favorable outcomes in their financial planning, so it's not really in the interest of customers to be causing a six-month delay in transfer times. So as a result, it's now much easier than it ever was and quicker to do things like this to consolidate your wealth, and that has led to an uptick in people doing this activity, but as I said, it's not as black and white as just saying, I'm going to consolidate, it's going to be easier, press the button, one, two, three, away you go. So, why do people consider consolidating their pensions in the first place? Well, more often than not, the reason is just simplicity. Fewer pensions to keep track of. We are all human beings, we've all got busy lives, we just don't want the hassle and the headache of having eight logins with eight pots of varying amounts ranging from five and a half thousand pounds to two hundred and twenty-five thousand pounds it's just a bit of a hassle factor. So having them together facilitates much more simplicity, easier administration, one login, one annual statement, one provider. It gives you clearer retirement planning, as I said. In some cases, it may result in lower costs, particularly if you've got existing schemes that may be outdated now and charging you more than perhaps more modern schemes will do. Particularly, workplace pension schemes often offer you favorable terms, reduced fund management charges, reduced provider charges, reduced administration charges. So, from a cost perspective, it may be beneficial. An important one is better investment choice. So typically, more modern pension arrangements offer what's called an open architecture investment universe. It sounds scary, but all that that is, is it facilitates you basically to invest in the best funds out there, your preferred fund of choice. Whereas some older schemes typically they will have a very restricted investment fund universe. So as a result, you may be in a pretty crap fund, and even if you wish to switch out of that pretty crap fund, there will be a similar bag of crap funds for you to invest in. So some people say I don't want to be restricted and only invest in, you know, I've seen cases where there's basically five funds you can invest in of varying risk profiles, and beyond that, you've got no control over your investment journey. So people say, I'm going to transfer this to a more modern arrangement so I can invest in the exact fund, the exact model portfolio that I want to do so. And of course, the human one, of course, is less chance of just losing track of old pots. So many people become oblivious to how many pensions they have, unless you're good with your administration, and most people aren't in life, let alone aren't with their financial planning, because this is a pretty boring subject. I'm trying to make it exciting, but it's pretty boring, and life comes up, more important things happen, so you may actually lose track of what you've got. So that's a pretty compelling case for just transferring. All of those are compelling reasons. Why on earth would you not consolidate? Well, it's important to note that there are some scenarios where you may not wish to consolidate, and this is because typically more modern schemes, yes, they've got lower charges, better investments, and they're easier administration, better digital dashboards to log in and view them. But generally speaking, you open a pension today, it's going to be a more vanilla black and white pension than in the past. And what I mean by that is some of the existing pensions you might have may have some valuable guarantees attached to them. Valuable guarantees that would be lost if you transfer. So it's super important when you're building up the picture of your existing pension wealth, ascertaining whether or not you should consolidate or whether you should just keep them where they are, that you understand some of the potential valuable guarantees that may be attached to them. Aside from the guarantees, there may be some rather hefty penalties or transfer charges that may apply that are buried in the small print that you don't appreciate until it happens. You may not have an understanding of the actual charges you're paying within the scheme. It may be more favorable than you think it is. There may also be a loss of employer benefits if you transfer an active workplace pension. So there's things you need to understand there. One tip I will give you is take care if you are transferring an existing workplace pension that your employer is currently paying into, you do want to be careful to ensure that the pension scheme remains open for future employer and your own employee pension contributions to go into. Typically, what you would want to do with this is facilitate a partial transfer. So let's say, for argument's sake, you've got 100 grand in your workplace pension. If you were to take a full transfer, sometimes the pension scheme will be inadvertently closed, which causes hassle for future pension contributions. So in this case, you may want to, for instance, transfer £99,000 and leave a little bit in there to facilitate the scheme to remain open. And it's obviously worth understanding from your incumbent scheme how much they need to remain in the pot. Some of them maintain minimum cash levels that you need to have, otherwise the scheme will be closed. So just take care regarding that, particularly if you have a current active workplace pension scheme. But on the valuable guarantees, so some of the things you want to understand is whether or not there are any guaranteed annuity rates applicable to the plan. So we know now that annuities typically are less in vogue than they once were. But relatively speaking, fewer and fewer people are purchasing annuities because they prefer to have more autonomy and control and to facilitate better long-term generational tax planning within their pensions. Again, it's out with this episode whether or not you should buy an annuity or not. But the thing you need to know is your existing scheme may have some attractive annuity rates that are on offer that you couldn't replicate in the general marketplace. So it's worth understanding that. So again, modern vanilla pension schemes, you'll have your 25% tax-free cash entitlement. Anything beyond that is taxable. Some of these older schemes may have actually greater than 25% tax-free cash. So you transferring it before you have crystallized it could mean you're actually losing out on tax-free money and resulting in tax liabilities in your new scheme that wouldn't have been the case in the old scheme. There may be a protected pension age attached to that scheme, whereas if you were to transfer it, you would just go to the generic pension age that everybody has to stick to. You've, for instance, there may be a protected pension age of 55 in the existing scheme, and with increases to the minimum pension age due to each 58. So what you may end up doing is shooting yourself in the foot that where you could have previously accessed that pension bot at 55 if that was the protected pension age. You now can't touch it till 58 in this example. So be mindful of that. There may also be some other safeguarded benefits in there. Again, speak to your existing provider, and what you need to get from them basically is actually in writing whether or not there are any guarantees that you could potentially forgo upon transfer. So these are the key ones you want to understand. Is you want to really understand is there any guaranteed annuity rates? Are there any guaranteed growth rates attached to the policy? And is there any provision for enhanced tax-free cash, or is it just a standard one? You also want to understand what the death benefits look like, and what I mean by that is does the pension scheme facilitate flexible drawdown of pension benefits? Does it facilitate UF Plus transactions? Which again, UFPLS, it's a horrible acronym, but what this basically means is every payment that comes out is partially tax-free, partially taxable, in contrast to drawdown, where you may take your lump sum, it goes to your bank account, and the remainder goes into a drawdown pot, which you take as you wish. The UF Plus payment is kind of you taking all your eggs at once. So one payment comes out, let's say you've got a hundred grand pension. If you're going down the full drawdown route, you would take your 25 grand tax for cash, 75 grand would go to a drawdown pot, and then you could draw down that drawdown pot, excuse the pun, as you wish, whereas an off plus payment goes directly from the pension into your bank account. Let's say you took an off plus payment of £4,000, £4,000 would go to your bank account, and a quarter of that would be taxable, uh sorry, three quarters would be taxable, a quarter would be tax free. So an off plus payment means it's all coming out to your bank account now, and the associated £25.75 split of tax-free and taxable happens directly, whereas drawdown facilitates a little bit more control and timing of your tax liabilities. There will be times in your financial plan where one means of the payment may be more beneficial from a tax planning angle than others, but the point I want to make is it's important for you to understand in terms of not only the death benefits but the retirement benefits of your current schemes is what do they offer? Are they modern? Are they restrictive? I've even seen some cases where if you pass away, you only get a refund of your contributions, which can result in significant gaps between what the actual pot value is, the fund value, and how much you actually get on death. So understanding what this looks like from a death and retirement planning angle is incredibly important to build up the picture of whether or not you should transfer these benefits or leave them where they are. So key point, listener, is before consolidating, do your homework, reach out to your provider and get this information. Understand if you've got guarantees, understand if there's any safeguarded benefits, understand what the death benefits look like within the plan, understand what the retirement options look like to you under the plan, and then and only then make a call on whether you should consolidate. So if I was you, Money Nerds, and I was looking at how I should be approaching this, is I would draw together a summary of all my existing pension plans, gather the provider names, the policy numbers, understand what the current values are, and obtain some recent paperwork so you understand exactly what they're worth and get your annual paperwork so that you can actually get the answers to these questions. Request up-to-date information. Confirm how much you're paying in charges. Confirm the funds that you're invested in. Confirm the alternative funds that you could be invested in. What's the transfer value? Are there any penalties on transferring? And then are there any of these guarantees that I talked about earlier that are attached to the plan that would be lost on transfer? Only then can you do a comparison between your existing schemes and your new schemes in terms of comparing the cost, comparing any valuable benefits that may be lost, comparing the retirement options available, comparing the death benefit options available, and only then if you still say yes, it's better for me to transfer than not, only then do you actually get the ball rolling with regards to whether you instruct this transfer as a cash transfer or an in-specie transfer. More often than not, your provider that is going to receive the funds will keep you right on this because let's be honest, it's in their interest to get more wealth under their platform or management. So they will keep you right, but generally speaking, for ease and for speed, a cash transfer is more palatable, favorable, and speedier. And then when everything transfers, you want to just make sure everything has arrived correctly, make sure all the sums that you anticipated have landed, and make sure, of course, that they are invested as you would wish and in line with your risk profile and the funds that you've chosen to be invested in. So there's a lot to be thinking about. I get that, money nerds, and this is why many people speak to financial planners at times like this to take away some of the headache. But if you are doing this yourself, knowledge is power, and hopefully, you now have some food for thought and some steps to put in place before you click transfer. Transferring can be a good outcome, it can be the right thing to do, but you need to understand these critical points before you press the button. So let me know how you get on, money nerds, and I wish you the very, very best of luck. Okay, I was trying to keep that under 20 minutes and I've overshot it. I do apologize, money nerds, but there is quite a lot of things to cover here, and hopefully this will be helpful for you as you're looking into this at the moment, if indeed it has been on your mind. Because I know it's one of those things that many people, perhaps who are less financially illiterate than you, money nerds, they often just go straight in with consolidate them without knowledge, without the power that they need to have to enact this stuff, and it can be costly. You can lose out on valuable guarantees, you can be paying more than charges than you are at the moment, you can be losing out on transfer benefits. So it's really important if you're considering consolidating your pensions. This is the stuff you should consider. And as ever, the right decision will depend on your own situation, money nerds. A pension transfer should never be rushed, especially if valuable guarantees can be lost. So make sure you understand what you have before you decide what to do next. So there we go. Let's wrap this up, episode 152. I hope that has been helpful. I hope you have had a good personal finance Friday or whenever you're listening to this. I will see you next Friday, as always, for a heads up on money. As always, if you have enjoyed the podcast, please do like, please do subscribe on the platform of choice that you're listening to this on. And if it is Apple, please leave me a comment. It really does mean the world to me when I hear from you, Money Nerds, that you're enjoying the podcast, and even better, sending me topic ideas for the future. Because if there's something on your mind, it's probable that it's going to be on someone else's mind too that's listening. I've been Benjamin Mitchell, you've been the Money Nerds. This has been Heads Up on Money. I'll see you next Friday. Enjoy your weekend. Stay safe out there. Goodbye for now.