Pension consolidation refers to the transfer of one pension plan to another. By transferring one to another, you reduce the total number of pension plans that you have.
Lots of us will have more than one pension. Most commonly, the reason for this will be moving jobs; perhaps you have had several employers over the years and have started a new ‘works pension’ with each one.
Auto Enrolment legislation means that people in the UK are more likely to have a pension through work these days, as your employer will ‘opt you in’ to a pension (providing you meet certain criteria). You then have to make the effort to opt-out if you don’t want the pension- meaning that if you do nothing, you stay in the pension! This is great for encouraging employees to make provision for their own financial futures and it certainly helps to guide people in the right direction, but it can often lead to people accruing several pensions over time.
For some people, they are happy enough with this. For others, the increased administration and paperwork that comes with having several pension plans can become onerous.
These days, the ‘tidying up’ of various pensions has become a hot topic; there are many providers out there who will draw your pensions together into one place. Sounds handy, doesn’t it?
Be careful! Pension consolidation isn’t always the best move.
Often, as annoying as it is to have several pension plans, leaving them well alone can provide the best financial results. It’s crucial that you receive financial advice before moving pensions around, in order to make sure you’re moving plans for the right reason, putting yourself into a better position than you were in before*.
* Better is not always synonymous with tidier.
Next week, I will explain a concept in the world of pensions: Triviality and Small Pots.
This concept, among others, is an important one to understand before embarking on a pension consolidation exercise. Following this, I will summarise the pros and cons of pension consolidation. This will help you to understand the merits- and pitfalls- of such an exercise before getting started and, as importantly, before incurring costs.
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Disclaimer: The above content does not constitute financial advice. Your circumstances may differ from those outlined and you should seek advice which is relevant to your own situation.