Pros and cons of consolidating and how to do it: Since auto-enrolment many more workers now collect a succession of often small money-purchase or defined contribution pension pots as they move jobs.
The idea of pension dashboards is nearly 10 years old. The Financial Conduct Authority first referred to the concept of a ‘pension dashboard’, which would allow individuals to see all their pension arrangements in a secure place online, in December 2014.[1]
A decade later, not only have pension dashboards yet to be launched, it was revealed last week the cost of the project has surged since 2020, as a number of ‘capacity and capability issues’ plagued what was meant to be a panacea for pension proliferation.[2]
Emma Sterland, Chief Financial Planning Director at leading wealth management firm Evelyn Partners, says: ‘The UK’s pension savers can be forgiven some confusion over Government-led measures to help them manage multiple retirement pots. While the lights have faded over the years on the pensions dashboard project, the Government has floated other pension-industry solutions to the issue of people accumulating a number of sometimes small pots through their working life.
‘We’ve had “pot follows member” versus “default consolidator”, and now we have “pot for life”.’
Since auto-enrolment many more workers now collect a succession of often small money-purchase or defined contribution pension pots as they move jobs.
Research suggests about 4.8 million pension pots are ‘lost’ in the UK, adding up to nearly £51billion, and 9 per cent of those are thought to be worth £10,000 or more.[3] The same study expected the total number of pension pots to rise by 130 per cent by 2050, from 106 million currently to 243 million.
At his 2023 Autumn Statement, the Chancellor trumpeted the ‘pot for life’ concept, which would involve workers choosing – presumably early in their working lives - a scheme from a pension provider that they keep ‘for life’ as they moved through different employers.[4] It would give employees a ‘legal right to require a new employer to pay pension contributions into their existing pension’.
Ms Sterland continues: ‘It’s probably wise for savers not to wait around for a solution like “pot for life” before they get a grip on their pensions. It would require structural reforms to the pensions sector and to occupational schemes, and if dashboards are anything to go by, don’t hold your breath. The idea was met with mixed enthusiasm in the pensions industry, there was no advance in the spring Budget, and with a General Election just months away it could easily be sidelined by a new Government.
‘But as the cogs of policy grind slowly round, today’s pot-juggling savers would do well to give their retirement some serious thought. Typically, savers make two big mistakes: they underestimate how long they will live and they underestimate or give no thought to what they need to save to support the lifestyle they want in retirement.
‘The closer you get to downing tools and leaving work, the harsher these realities become, and if your pension savings are disorganised and neglected, the tougher it will be to stop working and enjoy the sort of comfortable retirement you’d envisaged.’
The pros and cons of consolidating multiple pensions
Ms Sterland says: ‘On the face of it, it seems sensible to have your pension savings all in one place. It’s risky and difficult trying to manage multiple pension pots: it involves effort and admin to keep track of them all, pots can get forgotten about and hard-earned savings simply lost track of.
‘Even if someone is adept at keeping track of their deferred plans, it’s a plate-spinning exercise to manage where they are invested, gauge how much risk is being taken and overall performance, and figure out what sort of income their overall savings are likely to provide at retirement.
'Older legacy pension schemes can sometimes charge higher fees and even restrict some of the flexible options and death benefits introduced in 2015 with pension freedoms (by for instance not offering flexible drawdown), and here there can be a clear benefit to consolidating. You might also find that a newer scheme has a better choice of investment funds.
‘However, the opposite can be true for some savers, in that it might be better to keep hold of one or more of their legacy pots [see below]. In summary, it’s not to say we must all have just one pot but it is easier to take control of your retirement savings if they are not spread around all over the place.
‘In the ideal world, today’s workers would not accumulate a large number of small DC pots to start off with, and younger employees who are benefitting from auto-enrolment but starting to collect pots might think about rolling them up as they go along - whether that is into their latest, active scheme or into a personal pension, such as a self-invested personal pension (SIPP).
‘One great advantage of having fewer DC pots, or one pot, is that it is easier to keep an eye on how your pension savings are invested and how they are performing in terms of investment growth. That in turn will give more clarity on what sort of pot you might end up with at retirement, and therefore what sort of annual income you might be able to expect.
‘But there are some variables and complexities which mean those who have accumulated several pots that they think they want to combine should not rush into a DIY consolidation job.’
Taking control of your pensions: the advised route
Ms Sterland says: ‘The stereotype is that financial planning is for “the wealthy”, but that’s such a subjective term and many pension savers who might not have thought it was for them could benefit from professional advice – not least because it tends to improve retirement outcomes. Many people simply don’t have the awareness, time or motivation to manage and monitor their pension savings.
'Advice might seem a luxury for those with less substantial savings, but it can still benefit those who lack the knowledge or confidence to manage investments and plan for retirement. Where pension plans are complex and the saver is not sure of the features or benefits of legacy pots, advice can be invaluable regardless, to an extent, of the sums involved.
‘Also, the further one progresses towards retirement, or towards taking benefits, the more jeopardy there is in decisions over whether to transfer or consolidate pots, and the more valuable advice will be. A financial planner will have a much clearer picture not just of which plans are worth keeping hold of, but also of what drawdown looks like and whether consolidation is a good strategy in the transition to it.
‘Finally, and crucially, they will be able to put your pension savings into the context of your overall personal and financial situation, factoring your other assets and savings into a holistic plan. Most people underestimate what they need and advice at the very least will open their eyes to that.’
Taking control of your pensions: the DIY route
If you want to go it alone, Ms Sterland highlights the following points:
Which pots are worth keeping?
Deferred defined benefit, or final salary, pension schemes that offer a guaranteed income for life and are not subject to investment risk are usually worth keeping hold of.
‘The Financial Conduct Authority and the Pensions Regulator believe that it will be in most people’s best interests to keep their defined benefit pension,’ says Ms Sterland.
‘This is even more the case now than it has been in recent years as rising interest rates and bond yields have hit transfer values, so that members of these schemes are typically being offered much less to transfer out of them than they were just a few years ago. Even if you decide you want to transfer to a new scheme, if the value of your DB pension is more than £30,000, you’ll need to show that you have taken regulated financial advice.
‘Those with smaller DB pensions might think that the level of income on offer means they may as well cash them in or transfer to a DC scheme – but again caution must be exercised. A guaranteed index-linked income to top up the state pension is something many people pay good money for by using part of their DC pot to buy an annuity on the open market. There might also be valuable provision for a spouse.
‘If the valuation on offer is clearly favourable, that calculus might change and other factors such as ill-health with limited life expectancy could make a guaranteed annual income less attractive for those close to retirement.’
It’s not just final salary scheme pensions that people should be wary of transferring.
‘Some DC or money purchase schemes come with “safeguarded benefits” like guaranteed annuity rates, protected tax-free cash or spousal benefits, and savers should think twice before sacrificing these by transferring out.
‘Likewise some old-fashioned schemes charge exit penalties which might mean it’s better just to keep hold.’
How to consolidate
Employees have pretty much two options: rolling deferred pots into their current workplace scheme that they are paying into, or merging them into a personal pension such as a SIPP.
Ms Sterland says this is largely a matter of personal preference: ‘Many, especially younger, workers are probably best off rolling up their workplace DC pensions as they go along into their new employer’s scheme. But they should check they are happy with that scheme, in terms of its choice of funds and fees.
‘Bigger pension providers now run transfer services that are quicker than they used to be and will probably require you to supply various details like your pension policy and NI numbers.
‘SIPPs typically suit those who value a wider choice of investments and want to take a more active approach. While a SIPP will come with an account charge, these have come down in recent years, and those who need to pay in ad hoc lump sums can find it easier to do so into a SIPP. They can also offer more flexible options when it comes to accessing funds.
‘Even if a SIPP is preferred, employees will usually find it is better to remain in their current workplace scheme, as they will be receiving employer contributions and possibly the benefits of salary sacrifice. Any sort of ‘net pay’ scheme where contributions are paid from income gross of tax, will mean all pension tax relief is paid automatically, so higher and additional rate taxpayers do not have to go through the rigmarole of reclaiming their extra reliefs.’
The small pots issue
Ms Sterland says, ‘Recent evidence suggests more and more people are cashing in small pots in full, either early in or before retirement.[5] Some of these might genuinely need the money, and others may be consciously taking advantage of small pot rules. As long as tax implications have been considered and sufficient retirement savings exist elsewhere, why not?
'But many people cash in “small” pots - which could be larger than the industry definition of £10,000 - because they simply think they are “not worth keeping hold of”, when actually in aggregrate they could make a significant contribution to retirement income. With the failure of pension dashboards to materialise, and structural reforms like ‘pot for life’ potentially far off in the future, it can be difficult for savers to properly value their overall retirement fund, or to monitor how it’s performing.
‘So as more and more savers accumulate multiple workplace pensions under auto-enrolment, it’s probable that many will be tempted to get rid of pots they deem “too small to bother with”, or fail to pay sufficient attention to how they are invested, which in turn could leave them short in retirement. This under-appreciation of splintered savings is another argument for getting a grip on multiple pots.’
Evelyn Partners can provide both routes to consolidation. The DIY option is available through its consumer-facing digital investment platform Bestinvest, which offers an award-winning SIPP. While financial planning clients will have the process managed under advice, which can be accompanied by investment management services and tax advice where necessary.
NOTES
[2] NAO 10 May:
Investigation into the Pensions Dashboards Programme - NAO report
[3] CEBR
[4] Government response to ending the proliferation of deferred small pots - GOV.UK (www.gov.uk)
[5] FCA April 2024:
Some of our Financial Services calls are recorded for regulatory and other purposes. Find out more about how we use your personal information in our privacy notice.
Please complete this form and let us know in ‘Your Comments’ below, which areas are of primary interest. One of our experts will then call you at a convenient time.
*Your personal data will be processed by Evelyn Partners to send you emails with News Events and services in accordance with our Privacy Policy. You can unsubscribe at any time.
Your form has been successfully submitted a member of our team will get back to you as soon as possible.
Ireland 
USA 