Since October 2012, employers have been legally obliged to automatically enrol qualifying employees in a pension scheme and make contributions. Known as “auto-enrolment”, this policy changed the pension landscape and arguably benefited many people.
For example, the UK government reports that in 2021, savers contributed £114.6 billion to their pensions. This is a real-terms increase of £32.9 billion compared to 2012 when the auto-enrolment rollout began.
However, while auto-enrolment potentially made retirement saving easier for current and future generations, it has also magnified an issue with lost pension pots.
Over £50 billion of pension savings in the UK are at risk of being lost
Provided that you meet certain criteria, your employer must enrol you in a pension scheme and meet the minimum contributions (5% from you and 3% from your employer). The employer decides on the provider and scheme.
If you change your job, your new employer might not work with the same pension provider as your previous employer. As a result, you could start paying into a new pension scheme. Any savings in your old pension are still yours, but further contributions go into the new scheme.
You can ask your new employer to pay into your previous scheme. However, they are not obligated to do so.
Throughout the course of your life, you could end up with several different pensions if you move jobs several times. Unfortunately, many people lose track of these old savings.
According to MoneyWeek £50 billion in pension savings in the UK is at risk of being lost. An estimated 4.8 million pension pots were considered lost in 2023, and 22% of people believe they have lost some of their savings.
This could happen if you move home and forget to update your contact details with an old pension provider. In this instance, you may be missing out on a significant amount of money that you could use to fund your lifestyle in retirement.
Also, even if you keep track of all your pots, managing your savings can be more complicated if you have several different pensions, each with its own fees and charges, levels of growth, and additional benefits.
That’s why you might want to consider pension consolidation – combining your different pensions into one pot. This could potentially help you manage your savings more effectively, but there are certain situations when it may not be suitable.
Our upcoming webinar on 3 July 2024 will contain valuable guidance about combining your pensions. To register, please visit: https://fcadvice.co.uk/pension-consolidation-webinar
In the meantime, read on to learn how pension consolidation could help you streamline your savings, and some potential downsides to consider.
You gain control over your pensions and could increase your retirement savings
Finding lost pensions could be a relatively simple way to increase your retirement savings. It’s worth remembering that your pensions are invested and may grow over time. So, even if you only contributed to a pension for a short time, the pot could be much larger than you expect.
These additional funds could make it easier for you to achieve your dream lifestyle in retirement. If you think you have lost pensions from previous employments, this government website could help you track them down: https://www.gov.uk/find-pension-contact-details
Once you’ve found any old pensions, you might consider consolidating your different pots into one scheme. You could choose one of your existing pots and transfer the rest of your pensions into it. Alternatively, you could find a different provider and move all your savings into a new scheme.
One of the key benefits of consolidating your pensions in this way is that it gives you more control over your savings and makes them easier to manage as you only deal with one provider.
Each pension provider has its own fees and charges, and different fund options to choose from. When you consolidate, you can choose the provider with the lowest fees and compare the average growth from different funds.
Working with an adviser could be beneficial here as they can help you find the most suitable pension scheme for your savings, whether that’s an existing one or a new one. This could mean that you’re able to achieve the growth you need on your savings and reduce the fees you pay, meaning you have a larger pot to draw on in retirement.
Bear in mind that some pension providers may charge exit fees when you move your savings. The increased growth you could achieve or reduced management fees you could benefit from by moving your savings may make paying the exit fees worthwhile. However, this isn’t always the case, especially if you plan to retire and draw from your pensions soon.
It’s important to consider this cost of consolidation and whether the benefits are significant enough to outweigh the fees you might pay.
There are potential tax benefits associated with small pension pots
Before combining several small pension pots, you may want to consider the tax you’re likely to pay when taking lump sums from your pensions.
Normally, you can take the first 25% of your pensions as a tax-free lump sum. The largest total tax-free sum you can take across all your pots in 2024/25 is £268,275 and this is known as your Lump Sum Allowance (LSA). You will normally pay tax on any withdrawals that exceed the LSA at your marginal rate of Income Tax.
However, when you take a lump sum from a small pension pot worth £10,000 or less, with the first 25% being tax-free, this doesn’t count towards your LSA. You can usually withdraw an unlimited number of “occupational pension pots” – pensions provided by an employer – and benefit from the “small pot” rules.
Conversely, you can only withdraw three “non-occupational” or private pensions in this way. Any further withdrawals may count towards your LSA.
The small pot rules could mean that you’re able to take more tax-free withdrawals from your pensions if you keep pensions worth less than £10,000 separate, rather than consolidating them.
Additionally, you don’t normally trigger the Money Purchase Annual Allowance (MPAA) when withdrawing from a small pension pot.
In 2024/25, you can contribute up to £60,000 to your pension without triggering an additional tax charge. This is known as your “Annual Allowance”. However, when you flexibly access a defined contribution (DC) pension for the first time, you may trigger the MPAA. This effectively reduces your Annual Allowance to £10,000, meaning you can’t make as many tax-efficient pension contributions.
Meanwhile, when you withdraw funds from a small pension pot worth £10,000 or less, you don’t trigger the MPAA. This could give you more flexibility to withdraw a portion of your retirement savings while continuing to make tax-efficient contributions to other pensions.
You could risk losing important benefits from certain pensions
Some of your pensions may come with added benefits that you risk losing if you move your savings into a different scheme.
For example, you might have a defined benefit (DB) pension scheme, sometimes called a “final salary” scheme, which provides an income for the rest of your life.
These types of pensions are less common now and many employers offer a DC pension instead. When you pay into a DC pension, you build a pot of savings that you can withdraw from when you retire. But once the pot is spent, you can no longer make withdrawals.
If you transfer your savings out of a DB scheme and into a DC scheme when consolidating your pensions, you could lose the benefit of lifetime payments.
Certain pension schemes also offer payments to your family after you die or might let you take a larger tax-free lump sum than you normally can. Additionally, some pension schemes may let you access the funds before the normal minimum pension age of 55 or may provide guaranteed annuity rates, which exceed what is available on the open market.
As such, it’s important that you check whether you will lose any benefits before deciding whether to consolidate your pensions.
Get in touch
If you’re unsure whether pension consolidation is right for you, why not register for our upcoming webinar on 3 July 2024 to learn more?
You can also read our guide to pension consolidation for more useful information.
Alternatively, email hello@fcadvice.co.uk or call 0333 241 9900 to discuss your options today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
