combined pension pots

Should You Combine your Pension Pots?

Is it right to put all of your pots in one place?

Should you put all your pots together?

Firstly: what do we mean by pension pots? Essentially, pension pots are defined contribution or money purchase pensions where you build up as pots to use at retirement however you choose.

We don’t mean final salary or defined benefit type pensions which will pay you an income directly. You need specialist financial advice to consider transferring one of these.

Given that most people’s pension arrangements are defined contribution pots these days, it is likely that over the course of your working life you will build up quite a few pension pots as you change jobs. Estimates say that younger people may build up to ten pots or even more by the time they reach retirement. Transferring these pension pots is relatively simple and you don’t need advice in order to do it. In lots of cases, the provider you are transferring to will help you with all the paperwork needed. 

Considering all this, is it right to put all of your pots in one place?

When are you likely to want to put your pots together?

If you are going to combine all your pots in one place, when are you likely to consider it? The obvious time is near retirement, especially if you’re planning on using the pension freedoms. When it comes time to take your income, it’s a lot more practical to withdraw money from one place rather than a number of different pots. Another possible time you may consider this is when you change jobs; you may consider either moving all of your old pots to your new employer’s provider, or to a provider you have previously chosen to combine your previous ones with.

Finally, you may just consider doing this when you realise how much you’re paying in charges with your old pension pot providers. You may then realise, as many people do, that you can get a better deal elsewhere.

What should you think about before putting them all together?

Firstly, you never want to give up any employer contributions! If you are still receiving contributions into a pot from an employer, you should not even think about moving this elsewhere while you are still paying in as you will lose your employer contributions (and that’s free money!).

What about old pots you have from previous jobs? The key things to look out for are: guarantees and high exit charges. You may lose guarantees if you transfer pots, and some providers will charge you high exit fees to leave them.

Guarantees – some very old pots contain a guarantee that you can exchange the pot for income at a specified rate. These were written many years ago and have since become very valuable. Some older pots may also contain guaranteed investment returns, which again can be very valuable.

Exit charges – some old pots may have terms which charge you high exit fees if you leave sooner than expected. Although it seems unfair and frustrating, it’s often not worth paying those exit fees and leaving your money in that pot until you can move it without a high exit fee.

No guarantees or high exit charges; what else should I consider?

Most pension pots these days will not have any guarantees or substantial exit charges. Therefore, the main issue from a cost perspective to think about is ongoing charges and whether a new provider can offer you far lower charges.

When looking at provider fees, you should consider both the cost of the provider’s admin (also called platform fee), as well as the cost of any underlying investments. These are usually shown as an annual percentage of the pot value, but can also be fixed amounts. For some older (and even newer) policies, these can be difficult to understand. A good piece of guidance is this: if these charges are difficult to understand and unclear, it’s likely because they aren’t of the best value!

Some newer policies (including those from all the providers we partner with on Guiide) have very clear low charges. You’ll be able to see how much you’re paying every year and there won’t be any unexpected or hidden charges. The cheapest providers may charge you around 0.4% per year in total, including the underlying investment charges. Whilst those at the more expensive end may be something like 1.5% in total.

At first this may not sound like much, but even a 0.5% difference will make a huge difference to your pots over time (unless you get more growth to make up for the added charges).

How can Guiide help you lower fees?

Guiide is completely free to use. Take advantage of it, build a plan and compare our provider partner fees against your current ones within it. If there are savings in moving some or all of your pots to one of our partner providers, you’ll be able to switch providers easily. These providers will also help you with any paperwork needed if you choose to go ahead.

How do we do this? When you build a plan in Guiide, not only will we show you how to build up and drawdown the correct amount of income over time to get what you want, but as you input your details into the Guiide calculator, we’ll be able to calculate the expected value of your pots every month. We can then work out the overall charges you will expect to pay over your lifetime based on your specific plan. We don’t think there is anywhere else that does this?

Give it a try as the difference in lifetime charges may surprise you.

If you then choose to transfer to any of our partner providers, they will provide further guidance to help you check for guarantees, high exit charges or any other unexpected fees. One of our providers, OpenMoney also provides advice on whether a transfer to them is in your best interests (if it is not, they tell you it is not!) and which of their ready made portfolios are right for you. This is all included in their charges, so they are great for people who need this help.

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