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3rd Jul, 2024

Amy Davis
Amy Davis
Job Title
Head of Content

PensionBee was formed in 2014 with a vision for building a better retirement for everyone and has since become a leading online UK pension provider.

Research conducted by the Centre for Economics and Business Research, on behalf of PensionBee, recently revealed at least 4.8 million pension pots were deemed ‘lost’ among the UK population in 2023, with nearly one-in-10 workers believing they could have lost a pension pot worth more than £10,000.

With auto enrolment on pension schemes now a must, and job switching commonplace, the total number of pensions in the UK will only continue to rise. That’s where pension consolidation comes in – making pensions more manageable and accessible, all in one place.

Read our full interview with Becky O'Connor FRSA, Director of Public Affairs at PensionBee, or watch and listen to the video interview below:

Q: Can you explain what pension consolidation is and how it differs from managing multiple separate pension plans?

A: Pension consolidation is where you bring former workplace pensions from old jobs together into one place. This is for convenience, ease, and control, and so that you don't lose track of them.

Consolidation allows you to have them all in one place, and be able to have a bit more control and look after them for yourself, rather than them being managed by lots of different providers and littered all over the place. It’s particularly important if you have moved house a lot to not lose track of your old pensions, because usually providers send information to your address. And, if you've moved a lot, that's one way that people can lose track of their pensions.

We know that people are having more frequent job changes now, and with that comes greater risk of losing track of your pensions – they are incredibly valuable. Even if one seems quite small, if you've had a job for a couple of years, and you don't think you've built up a huge pension through it, over time, that pension could become incredibly valuable. So, it's always worth making sure that you keep track of them. If you can't, then consolidate them.

Q: What are the primary benefits of pension consolidation for individuals approaching retirement?

A: The benefits of consolidating a pension as you're approaching retirement are that, when you actually come to be able to access your pension - which is from age 55 currently, although that minimum age is rising to 57 from 2028 - it can make it much easier to withdraw from your pension if you only have one pot rather than several pots. For example, if you have five or six pots from previous jobs, it can make it harder to know which one to access first, and harder to keep track of withdrawals.

It's beneficial for tax purposes too, as accessing your pension has tax implications. The first 25% of your pension you take tax free, but then after that, your withdrawals are taxable as income. So, from the point of view of keeping track of your tax liability, it can be handy to have your pensions all in one place.

On top of this, it can make pension and retirement planning much easier. When you get to a certain age, you’re still working, but you've also got one eye on your retirement. You are thinking about how much you're going to need as an annual income when you retire, how much tax-free lump sum you might want to take, but also about any other expenses that you might have. Maybe you're thinking whether or not you can retire early, or whether you're going to have to put it off a bit longer. Having all your pensions in one place can help you make these decisions more easily, because you can see the amount, not aggregated across lots of different pots, but in one pot altogether. Doing so can just give you a little bit more control.

As you approach retirement age, your investment needs from your pension may also be changing. When we're in the early years of our working life, we want our pension to be growing quite aggressively. Therefore, in the early stages, pensions tend to be invested in high-growth equities so that they have a higher growth profile. For people who are a bit older and approaching retirement, what you want to be doing is reducing your risk a bit. As a result, the closer you get to retirement, you want to be maybe taking a little percentage out of your pension, out of equities, and putting it into ‘safer’ assets like bonds and maybe even a little bit of cash. That's to reduce the risk of losses, because really the last thing you want to happen when you're about to draw on that pension, is that it suddenly falls in value, which can be a risk when it's 100% invested in equities. It doesn’t matter so much earlier in working life because you've got plenty of time for it to grow and build back up again.

Back to consolidating into one pension plan, where you've chosen the plan according to your retirement goals, your retirement date, and your investment preferences, that can give you a little bit more control over how your pension is invested too – and for all those reasons, that can be really important.

Q: Are there any risks or downsides associated with consolidating pensions? If so, what are they?

A: You do still have to make sure that you are looking at the value of your pensions. Pensions come with fees, there's a cost. You may not be aware of it, but typically the cost of a pension is around 0.5-to-one per cent. They can be even cheaper than that - you can have pensions that cost 0.2% - that's a percentage of the overall value of your fund.

And some, those that are perhaps administered by independent financial advisers on a very bespoke basis, and sometimes for much larger pots, can be more than one per cent. Just to give you an idea of what is a reasonable value, there is also a cap on defaults, pension funds, set by the government and regulators, which is 0.79%. So, if anything is above that, then, you know, you're getting into the pricier end of pensions.

Sometimes that higher fee can be justified, for example, if your pension is actively managed, but you have more of a bespoke service. If it's a positive impact pension, for instance, and the companies that are selected within that plan have had to be carefully managed or actively managed by the fund managers - that can justify a higher fee. But for pensions that are essentially tracking the performance of global equity markets, you would expect to pay a much lower fee because those pensions are passively managed rather than actively managed. Which means there's less work done on the part of the fund managers to look after your pension. Fees are important to look at, because they can, over time, eat away at the value of your pension. You want to be keeping that fee as reasonably low as possible.

Another risk might be that you choose a plan that is less suitable for your needs than the one that you were in previously, and that can be hard to know unless you look under the bonnet of the previous and new plan. So that's not just fees, but going back to what I was talking about earlier, investment risks, and whether or not the investment risk profile of the new plan is, more or less, suitable for your own retirement goals and needs than the one that you were in before. It's important to keep track of that, and that is often to do with the level of investment risk, which obviously, as I mentioned before, depends on where you are in your career and how close you are to retirement. An example of what might be not a great decision from the point of view of your retirement goals would be, if you're just 25 years old and you consolidated into a lower risk plan than the one that you were on before. That may leave you at risk of generating lower returns year after year. Which, given if you're 25, and you've got perhaps more than 40 years until you retire, that wouldn't be giving your pension the greatest chance of growth at that stage - that would be a potential risk too.

Q: How does pension consolidation impact the management fees and administrative costs associated with pensions?

A: There's usually an annual fee for a pension. And with PensionBee we charge a percentage of the pot, like most providers. Some providers do charge flat fees which can work out as good value on larger pot sizes but, on smaller pot sizes, that flat fee can eat into your funds much more than a percentage fee. You'd have do the calculation yourself, to compare the percentage fee that you're paying with, a flat fee alternative, which will obviously vary depending on the pot size.

Fees do also change sometimes depending on how much you hold. With PensionBee the fee on the plans tends to come down, once you reach certain levels - that's to do with the volume of assets under management and it becomes easier to manage once you get to a certain level.

Overall, when you're looking at percentage fees you want to be calculating them in terms of pounds and pence on your own pot size and comparing it to other plans, to make sure that you're getting the best value.

Q: Can you provide examples of scenarios where pension consolidation might not be advisable?

A: There are circumstances in which you probably wouldn't want to move your existing pension. So, if you are currently paying into a workplace scheme and your employer is paying in and you're receiving tax relief, you wouldn't want to, in most circumstances anyway, move that to your consolidation pension pot, because you would then potentially lose the benefits of those employer contributions, and any other tax benefits of that workplace scheme.

All in all, current workplace pensions are generally best kept where they are. In some circumstances, employers may consider paying into your own pension, but you would have to ask them that. However, in the majority of cases, they may turn you down because it's extra admin hassle for your employee.

Other circumstances where it might not be best to consolidate would be if you have a defined benefit pension, or you might have a pension that has some defined benefit style guarantees, and valuable benefits. This is usually to do with offering guaranteed income. When you reach retirement, if you have a defined benefit scheme, or what's known as a hybrid scheme, which has some defined benefit element, you could be offered a guaranteed level of income in retirement from that pension that can be really valuable, and could be better for you in retirement than the income that you would be able to generate from your defined contribution pot. Therefore, it's important to know whether or not you have any defined benefit or similar hybrid benefits with your old pensions before moving them. And actually, if you do have a defined benefit or hybrid scheme, you need to take financial advice if that pension is worth more than a certain amount anyway, before you can move it, because these are the rules in place that protect people from making decisions about moving pensions that are probably best left where they are.

In this case, people who have worked for large private sector employers, and those who worked a long time ago when defined benefit schemes were actively being offered, will want to take this into consideration. Younger people, who have been largely employed since 2006/2007, in the private sector, are less likely to have any defined benefit pensions from past employment.

Consolidation, in the main, works for people with defined contribution schemes that can more easily, or sensibly, be moved from one provider to another.

Q: What are some common misconceptions people have about pension consolidation?

A: One of the misconceptions that people have around consolidating their pension is that they have to do it. You absolutely don't have to do it. I know I work for a pension consolidation company, but it's not essential. It does start to make sense when you have built up several pensions and it's starting to get a bit confusing - in terms of what the benefits are of each and how much you have, and you start to worry about losing track of them. At that point, it really does make sense to start thinking about consolidation.

From the point of view of actually doing it. People think it's hard, and people think it takes a long time. Increasingly these things are not true. It's increasingly easy and speedy to consolidate pensions. A lot of the work is done for you by the likes of PensionBee, so once you have provided the details of your employer and policy number, the process is really taken care of. There can be delays along the road, which can be to do with the processing of information between providers, but generally speaking you can expect the process, if all the information is in place, to take around ten days. And that's the ‘unofficial’ target, that we have as a business.

So, it can be quick. It does depend on the providers. It is getting quicker generally speaking, and it can be done with very little information and effort from you. So, in that sense, don't be put off by thinking it's going to be a massive hassle, because you may be pleasantly surprised.

Q: To what extent should employers encourage employees to consolidate previous pensions?

A: I think in general, there's lots more that employers can do to educate their staff on pensions, and be a little bit less passive, dare I say, than they have been historically. So typically, employers are great at providing pensions. They work with the pension providers and the administrators to give information at the point that people join the scheme. But then, typically, that engagement starts to fizzle out. And then obviously when people leave a job, it's a question of ‘you don't pay into this pension anymore, but the pension provider will still send you an annual statement once a year’, and that's it. There isn't really any kind of exit type process on pensions when you leave a job.

And I think creating some sort of document or email, making some suggestions for what people exiting might want to do with that pension, or certainly what they should do with it, which is keep the existing scheme up to date with address details, keep your beneficiary details up to date. Beneficiaries is a very important one, because often people fill out the beneficiaries of their pension and then over the years things could change. Employers should also highlight that your needs may change over time, and that you might want to review the details of your pension proactively, certainly every year. And at that point, consider consolidating if that pension scheme is no longer meeting your needs.

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