The number of individuals saving into private sector workplace pensions in the UK has reached 23 million, doubling since 2012, largely due to auto-enrolment. This trend, combined with people changing jobs more frequently, means many workers are likely to accumulate multiple pension pots.
Alistair McQueen, head of savings and retirement at Aviva, noted that with an average job tenure of around five years, individuals may end their working lives with numerous pension pots, leading to increased interest in consolidation.
Combining pensions can simplify management, making it less daunting to engage with investments, according to Kirsty Stone, a partner at The Private Office. It can also lead to savings of thousands of pounds by moving funds into schemes with lower annual management fees or better returns. Furthermore, consolidation can facilitate flexible drawdown in retirement, making it easier to access funds from a single provider.
However, consolidation is not always beneficial. Steve Webb, a partner at LCP and former pensions minister, cautioned that individuals should consider why they are consolidating, as existing pensions continue to grow and may offer better terms. Potential downsides include losing guaranteed annuity rates, the right to take more than the standard 25% as a tax-free lump sum, or incurring higher management fees if moving to a private pension or Sipp from a workplace scheme.
Those with defined benefit (final salary) pensions are advised against transferring them, as it would almost certainly result in a loss of money. Legislation requires financial advice for transfers of defined benefit pensions with a cash equivalent transfer value over £30,000.
The process for combining defined contribution pensions is generally straightforward, with providers typically handling the administration once contacted. However, providers will not offer advice and will follow instructions given.