Why you should think twice before consolidating a final salary pension<\/h3><\/div>![\"Danny](\"https:\/\/www.finder.com\/finder-us\/wp-uploads\/sites\/3\/2020\/07\/Danny-Butler.jpg\")
<\/p>
Finder insurance expert Danny Butler<\/a> explains<\/em><\/div><\/div>There\u2019s a reason final salary (also known as defined benefit, or DB) pensions are referred to as \u201cgold plated\u201d. It\u2019s because they\u2019re valuable and increasingly rare. Once upon a time, they were the standard pension type you\u2019d be offered by an employer. Unlike defined contribution (DC) schemes, where the ultimate value of your pension depends on investment performance, with defined benefit pensions you\u2019re guaranteed an income for life that\u2019s equivalent to a proportion of your salary when you leave the company. The amount depends on how many years you work for the company.<\/p>
Consolidating a defined benefit pension will almost certainly mean moving it into a defined contribution scheme.<\/p>
This will effectively mean translating the value of your DB scheme into a cash value, which is then transferred to a DC scheme and invested. In some cases, employers are even willing to pay an extra incentive to persuade you to switch (as DB schemes are expensive for employers to run).<\/p>
But even with such incentives, giving up the certainty of a guaranteed income for life will almost certainly leave you worse off in the long run. In fact, with some public sector DB schemes (including NHS and teachers\u2019 pensions), there\u2019s a ban on transferring your pension to a DC scheme. With private sector schemes, it\u2019s usually permitted, but it\u2019s usually only worth contemplating in specific circumstances. For example, if you are in poor health and have a lower life expectancy than average, you may be of the view that you won\u2019t be able to reap the maximum benefits from a lifetime of guaranteed income. In this case, transferring to a DC pension would give you the flexibility to take bigger lump sums and\/or a higher income over a shorter period.<\/p>
However, you should also bear in mind that most DB schemes continue to pay an income to financial dependants after you\u2019ve gone. Transferring out of the scheme will do away with this benefit.<\/p>
The good news is that it\u2019s unlikely to be a decision you have to make alone. Unless the value of the pension is less than \u00a330,000, anyone looking to transfer out of a DB scheme is obliged to take regulated financial advice<\/a> to help them weigh up the pros and cons.<\/p><\/div><\/div><\/div><\/article>Are there any other reasons not to consolidate my pensions?<\/h3>
Even if you have a defined contribution pension, there can be a few other reasons to pause for thought before taking the consolidation leap.<\/p>
- If your plan has a guaranteed annuity rate (GAR).<\/strong> These guarantees may allow you to buy an annuity<\/a> at a preferential rate. This will give you a much higher annuity income than you would otherwise get. If it\u2019s not clear from your pension paperwork whether you have a GAR, contact the pension provider to ask. If you have a GAR, you\u2019d lose it by transferring to a different scheme. As such, if you are considering using your pension pot to buy an annuity when you retire, it\u2019s probably best to leave that pot where it is.<\/li>
- If your scheme has other benefits that you\u2019d lose by switching.<\/strong> Some schemes allow you, for example, to take a higher tax-free lump sum or extra death benefits (the benefits payable to your beneficiaries if you die before taking your pension).<\/li>
- If there are high fees to transfer a pension.<\/strong> Hefty exit penalties on some schemes will eat into your pot\u2019s value. In this case, you\u2019ll need to assess whether the pros of switching (greater convenience, potentially lower annual management charges) outweigh the cons.<\/li>
- If a pot is worth less than \u00a310,000.<\/strong> This may sound counterintuitive, as having multiple small pots would usually be a good reason to combine them. The full explanation is a bit complicated. But, essentially, if you\u2019re considering taking a pension lump sum before you actually retire but still want to carry on making payments into a scheme, how much you take as a lump sum can affect the tax relief you receive on future contributions. This is under something called the Money Purchase Annual Allowance rules. However, you can often take the full amount of pots this small without it affecting your allowance. You can do this up to 3 times for personal pensions; the limit is different for workplace pensions, so you\u2019ll need to check with the provider. If there\u2019s a chance you might want to go down this route, it could be worth keeping small pots separate. Withdrawing pots this small also won\u2019t count towards your lifetime allowance. This is the maximum amount you\u2019re able to hold across all your pension pots without incurring an extra tax bill when you start taking money out.<\/li><\/ul>
Can I consolidate a pension that my employer is paying into?<\/h3>
Depending on the terms of the scheme, you might be able to. But you probably shouldn\u2019t (unless it\u2019s a different workplace scheme with the same employer). Moving an existing workplace scheme into a personal pension, for example, would probably mean losing your employer\u2019s contributions. And these are well worth having.<\/p>
Are there any penalties for consolidating pensions?<\/h3>
There aren\u2019t any penalties for consolidation, per se. But with some pension plans, you\u2019ll pay exit penalties to leave the scheme, which amounts to the same thing. They can add up to thousands of pounds, so make this one of the first things you check when you\u2019re considering a transfer.<\/p>
How can I consolidate my pensions?<\/h3>
If you\u2019re using a financial adviser, they will usually manage the consolidation process for you. You may need to fill in a few forms.<\/p>
If you\u2019re managing the consolidation process yourself, there are a few steps to follow.<\/p>
- Step 1:<\/strong> Ask the pension provider or scheme administrator for the current amount you have in your pot (the \u201ctransfer value\u201d). Bear in mind this may change by the time you actually transfer, as a result of changes in investment value.<\/li>
- Step 2:<\/strong> The provider will give you a document that sets out the transfer value, details of any extra benefits, information on any exit penalties and any other information the new scheme will need if you go ahead with the transfer.<\/li>
- Step 3:<\/strong> Fill in any forms required to initiate the transfer process. These may be online or paper forms, depending on the scheme you\u2019re transferring to. In some cases, you may have to fill in forms for your existing provider too. The new provider will usually contact your existing provider to arrange the transfer.<\/li><\/ul>
Once you\u2019ve started the process of transferring to a new pension scheme, your existing provider must move the pension across to the new scheme within 6 months.<\/p>
Can I cancel a pension transfer?<\/h3>
Simply asking an existing provider for information about the transfer value won\u2019t commit you to anything. Even once the transfer process has started, you may be able to pull out (check the terms before you give the go ahead). Even once the money has been transferred, you\u2019ll receive a cancellation notice and will usually have 30 days to cancel the transfer. But, and it\u2019s an important but, that doesn\u2019t mean that your previous pension scheme will be willing to take your money back. Many won\u2019t. So, while you can choose another new or existing scheme to transfer to instead, you probably won\u2019t be able to reverse your decision entirely.<\/p>
In short: don\u2019t go ahead with a transfer unless you\u2019re certain it\u2019s the right choice.<\/p>
Should I transfer my previous workplace pension if I change jobs?<\/h3>
There\u2019s no right or wrong answer to this. If you change jobs, your previous workplace pension won\u2019t be transferred automatically, but you can usually choose to have it transferred to your new employer\u2019s scheme. This may work out as more convenient, as it reduces the number of pension pots you need to keep track of. But before you crack on, check for any exit penalties and compare the ongoing charges on both schemes. There\u2019s no point in moving your pension into a more expensive plan just to keep things simple.<\/p>
And, if your previous workplace pension was a final salary scheme, it\u2019s almost certainly best off left right where it is. Moving it risks losing significant benefits.<\/p>
Do I need a financial adviser to consolidate my pension?<\/h3>
Usually not. If you\u2019re confident doing so and are willing to put in the legwork to make sure you choose the right scheme to consolidate into, then you can go ahead without advice.<\/p>
There is an exception to this rule though. If you have what\u2019s known as \u201csafeguarded benefits\u201d on a pension, and the value of the benefits is worth more than \u00a330,000, you\u2019ll have to get regulated financial advice before transferring money out of the scheme. Legitimate pension providers won\u2019t be willing to accept your money unless you\u2019ve received this advice. This rule applies to, for example, final salary pension schemes or defined contribution schemes with a guaranteed annuity rate. It was put in place to reduce the risk of people giving up these benefits without fully considering the implications.<\/p>
With more standard types of DC pension, you can consolidate without advice, but unless the sums involved are very small, it\u2019s still often wise to seek it out. The cost of doing so could be a price worth paying to avoid an expensive mistake with the money you\u2019re relying on to fund your retirement. If you get regulated advice, the adviser is responsible for the recommendations you follow. If you follow their advice, and it turns out to have been a poor choice, you can complain and potentially get compensation.<\/p>
Pros and cons of consolidating pensions<\/h3>\n \n Pros<\/h4>\n \n - Streamlines your finances by giving you fewer pension pots to keep track of and manage<\/li>\n
- You could pay less in ongoing charges if you move from schemes with high charges to a more competitive one<\/li>\n
- Potential to gain access to a wider range of investment strategies or specific investments (particularly with a SIPP<\/a>)<\/li>\n <\/ul>\n <\/div>\n \n \n
Cons<\/h4>\n \n - It's not worth transferring from a scheme with lower charges to one with higher charges just to keep things simple<\/li>\n
- It's rarely worth transferring out of schemes with safeguarded benefits, such as final salary pensions or schemes with guaranteed annuity rates<\/li>\n
- Exit penalties for leaving a pension may outweigh the benefits of consolidation<\/li>\n <\/ul>\n <\/div>\n <\/div>\n
Bottom line<\/h3>
In the right circumstances, consolidating multiple defined contribution pension pots into a single scheme can cut down on paperwork and could even leave you with more in your pot come retirement. But it\u2019s not a step to be taken hastily, and in some cases, shouldn\u2019t be taken at all. Always do your research and weigh up the pros and cons we\u2019ve highlighted in this article. And, if in doubt, consider regulated financial advice<\/a>. It could end up saving you more than it costs.<\/p>Frequently asked questions<\/h3>- \n \n
\n
<\/p>
There\u2019s a reason final salary (also known as defined benefit, or DB) pensions are referred to as \u201cgold plated\u201d. It\u2019s because they\u2019re valuable and increasingly rare. Once upon a time, they were the standard pension type you\u2019d be offered by an employer. Unlike defined contribution (DC) schemes, where the ultimate value of your pension depends on investment performance, with defined benefit pensions you\u2019re guaranteed an income for life that\u2019s equivalent to a proportion of your salary when you leave the company. The amount depends on how many years you work for the company.<\/p>
Consolidating a defined benefit pension will almost certainly mean moving it into a defined contribution scheme.<\/p>
This will effectively mean translating the value of your DB scheme into a cash value, which is then transferred to a DC scheme and invested. In some cases, employers are even willing to pay an extra incentive to persuade you to switch (as DB schemes are expensive for employers to run).<\/p>
But even with such incentives, giving up the certainty of a guaranteed income for life will almost certainly leave you worse off in the long run. In fact, with some public sector DB schemes (including NHS and teachers\u2019 pensions), there\u2019s a ban on transferring your pension to a DC scheme. With private sector schemes, it\u2019s usually permitted, but it\u2019s usually only worth contemplating in specific circumstances. For example, if you are in poor health and have a lower life expectancy than average, you may be of the view that you won\u2019t be able to reap the maximum benefits from a lifetime of guaranteed income. In this case, transferring to a DC pension would give you the flexibility to take bigger lump sums and\/or a higher income over a shorter period.<\/p>
However, you should also bear in mind that most DB schemes continue to pay an income to financial dependants after you\u2019ve gone. Transferring out of the scheme will do away with this benefit.<\/p>
The good news is that it\u2019s unlikely to be a decision you have to make alone. Unless the value of the pension is less than \u00a330,000, anyone looking to transfer out of a DB scheme is obliged to take regulated financial advice<\/a> to help them weigh up the pros and cons.<\/p><\/div><\/div><\/div><\/article> Even if you have a defined contribution pension, there can be a few other reasons to pause for thought before taking the consolidation leap.<\/p> Depending on the terms of the scheme, you might be able to. But you probably shouldn\u2019t (unless it\u2019s a different workplace scheme with the same employer). Moving an existing workplace scheme into a personal pension, for example, would probably mean losing your employer\u2019s contributions. And these are well worth having.<\/p> There aren\u2019t any penalties for consolidation, per se. But with some pension plans, you\u2019ll pay exit penalties to leave the scheme, which amounts to the same thing. They can add up to thousands of pounds, so make this one of the first things you check when you\u2019re considering a transfer.<\/p> If you\u2019re using a financial adviser, they will usually manage the consolidation process for you. You may need to fill in a few forms.<\/p> If you\u2019re managing the consolidation process yourself, there are a few steps to follow.<\/p> Once you\u2019ve started the process of transferring to a new pension scheme, your existing provider must move the pension across to the new scheme within 6 months.<\/p> Simply asking an existing provider for information about the transfer value won\u2019t commit you to anything. Even once the transfer process has started, you may be able to pull out (check the terms before you give the go ahead). Even once the money has been transferred, you\u2019ll receive a cancellation notice and will usually have 30 days to cancel the transfer. But, and it\u2019s an important but, that doesn\u2019t mean that your previous pension scheme will be willing to take your money back. Many won\u2019t. So, while you can choose another new or existing scheme to transfer to instead, you probably won\u2019t be able to reverse your decision entirely.<\/p> In short: don\u2019t go ahead with a transfer unless you\u2019re certain it\u2019s the right choice.<\/p> There\u2019s no right or wrong answer to this. If you change jobs, your previous workplace pension won\u2019t be transferred automatically, but you can usually choose to have it transferred to your new employer\u2019s scheme. This may work out as more convenient, as it reduces the number of pension pots you need to keep track of. But before you crack on, check for any exit penalties and compare the ongoing charges on both schemes. There\u2019s no point in moving your pension into a more expensive plan just to keep things simple.<\/p> And, if your previous workplace pension was a final salary scheme, it\u2019s almost certainly best off left right where it is. Moving it risks losing significant benefits.<\/p> Usually not. If you\u2019re confident doing so and are willing to put in the legwork to make sure you choose the right scheme to consolidate into, then you can go ahead without advice.<\/p> There is an exception to this rule though. If you have what\u2019s known as \u201csafeguarded benefits\u201d on a pension, and the value of the benefits is worth more than \u00a330,000, you\u2019ll have to get regulated financial advice before transferring money out of the scheme. Legitimate pension providers won\u2019t be willing to accept your money unless you\u2019ve received this advice. This rule applies to, for example, final salary pension schemes or defined contribution schemes with a guaranteed annuity rate. It was put in place to reduce the risk of people giving up these benefits without fully considering the implications.<\/p> With more standard types of DC pension, you can consolidate without advice, but unless the sums involved are very small, it\u2019s still often wise to seek it out. The cost of doing so could be a price worth paying to avoid an expensive mistake with the money you\u2019re relying on to fund your retirement. If you get regulated advice, the adviser is responsible for the recommendations you follow. If you follow their advice, and it turns out to have been a poor choice, you can complain and potentially get compensation.<\/p> In the right circumstances, consolidating multiple defined contribution pension pots into a single scheme can cut down on paperwork and could even leave you with more in your pot come retirement. But it\u2019s not a step to be taken hastily, and in some cases, shouldn\u2019t be taken at all. Always do your research and weigh up the pros and cons we\u2019ve highlighted in this article. And, if in doubt, consider regulated financial advice<\/a>. It could end up saving you more than it costs.<\/p>Are there any other reasons not to consolidate my pensions?<\/h3>
Can I consolidate a pension that my employer is paying into?<\/h3>
Are there any penalties for consolidating pensions?<\/h3>
How can I consolidate my pensions?<\/h3>
Can I cancel a pension transfer?<\/h3>
Should I transfer my previous workplace pension if I change jobs?<\/h3>
Do I need a financial adviser to consolidate my pension?<\/h3>
Pros and cons of consolidating pensions<\/h3>
Pros<\/h4>\n
\n
Cons<\/h4>\n
\n
Bottom line<\/h3>
Frequently asked questions<\/h3>
\n