More people today are enrolled in a workplace pension scheme than ever before. This is because of a government policy called auto-enrolment, which was introduced in 2012 and requires all firms to set up a workplace pension and enrol their employees into it, unless they choose to opt out.
Whilst auto-enrolment has been a huge step forward for the industry, the government estimates that people will have 11 different jobs during their working lives, and with every new job comes another new pension.
The Association of British Insurers (ABI) estimates that more than 1.6 million pension pots worth £19.4bn are “lost” – the equivalent of £13,000 per plan. In thirty years’ time, this could be as many as 50 million pots forgotten by people changing jobs, according to the government.
Here’s why it could be worthwhile to bring together your old pension pots.
5 reasons why one personal pension pot could be a good idea
1. It’s easy to do
It’s pretty straightforward to transfer your pension to another provider, like Moneybox. On average, online transfers take around three weeks to complete. All we need to get your transfer started is the name of your old provider and your policy number.
Traditional pension providers could definitely make the transfer process easier, as some still use manual processes such as paper form. At Moneybox, we’re committed to making it as easy as possible to bring together your old pension pots and will do as much of the heavy lifting as we can. If you don’t know the name of your old pension provider or can’t find your policy number, there are services you can use to help track them down. Check out our tips here.
2. You may get more choice in where your pension is invested
The range of investment options in legacy workplace pensions may be more limited than a personal pension, where you can choose how you want your money invested. For example, with a personal pension you may be able to select a provider that offers access to a socially responsible funds, allowing you to choose investments that are more aligned to your values.
3. Account management is easier with fewer pots
Having to remember one login is always going to be better than remembering eleven! Managing multiple pension accounts can be hard, and with little communication from traditional providers, tracking down those old account details could prove even more difficult.
4. You could save on fees
Pension pots potentially have decades to grow. This is brilliant for returns because they benefit from the power of compounding, where you not only get returns on your original investment, but returns on your returns. However, it’s a double-edged sword: compounding also applies to fees. So, the higher the annual charges, the greater the long-term cost to your pension.
When you leave a job, employer contributions will stop and you’ll continue to be charged fees as the provider is still managing your money. What you pay in fees is based on what you have in the pot, rather than what you’re paying in. If you’re being charged over the odds, it can have a significant impact on your pension. Let’s see how this works.
Let’s say you start saving £500 a month into a typical pension with a 0.75% charge. While we can’t predict future performance, if your fund grows by 5% a year, it will be worth around £364,000 in 30 years’ time – after costs have been deducted.
But what if the charges are double, i.e. 1.5% instead of 0.75%? It doesn’t sound much but the fund will only earn 3.5% a year, even if the investments performed in exactly the same way. That slices over £45,000 off your pension!
On top of that, most providers have tiered fees, where the more you have saved, the lower the fee. This means if you have lots of pots with smaller values, you could be paying higher fees with each provider. It’s best to do your research and ensure you take fees into account before transferring your pensions.
5. It’s OK to rely on one pension provider
You may be thinking: “I’ve heard diversification in pensions is a good thing – so surely having more pots is better?” When we talk about diversification, we’re referring to the assets within pensions – not the number of pots you have. Yes, your individual pots should be invested in lots of places (e.g. different regions or industries) to help spread risk, but this isn’t achieved simply by having more pensions. In fact, it’s possible you could end up investing in the same fund via different platforms or pension providers.
When shouldn’t you transfer a pension?
While transferring and consolidating your pensions can be beneficial, there are times where it might not be a good idea.
If you have a Defined Benefit pension
These schemes are linked to your salary and the years you worked for an employer – and are usually very valuable. In fact, if you have this type of pension with a value over £30,000 you are required to get independent financial advice before transferring it to ensure you make the right decision for you.
If you have high exit fees to transfer your pension
While exit fees are rare nowadays (the government has made some moves to prevent them), if you do have them they could be large and significantly reduce your pension fund. Where Moneybox has the information from your old provider, we’ll check with you before transferring a pension which has an exit fee – but sadly not all of them tell us, so it’s best to do your research.
If you have special benefits
Some pensions (often defined benefit) come with special benefits, for example, a guaranteed annuity rate. Or some rare schemes allow you to draw more than the usual 25% tax free lump sum at 55. These can be valuable benefits and losing them might outweigh the benefits of moving your pots. If you’re unsure, you should consider getting some independent financial advice.
For many, consolidating your old pensions can offer more control, better fees and peace of mind. Find out more about How the Moneybox Personal Pension works.
Please note Moneybox cannot accept a pension you’re currently paying into, or any old pensions that provide guaranteed benefits when you retire.
All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest.