Should you put all your pension funds in one pot?

A bus sponsored by Scottish Widows marks Pensions Awareness Day

The Scottish Widows-sponsored Pensions Bus, which visited cities across Scotland and England to mark Pensions Awareness Day, gave people the opportunity to ask the on-board team of advisers any retirement-based questions they had.

Robert Cochran, retirement expert at Scottish Widows, said: “One of the most popular questions asked was whether people could consolidate their pension pots. We found that many people wanted to consolidate sometimes very small pots so that they could better manage their pension savings.”

The savings awareness tour was in the same week as the UK government revealed that a prototype “pensions dashboard” will launch in March.

The aim of the project, set out in the Budget this year, is to make it easier for savers to view all their retirement savings in one place, including their workplace, personal and state pensions and potentially products such as Isas and the new lifetime Isa.

The government wants the dashboard to be fully available to consumers by 2019 and has warned reluctant providers – including those running “closed” pension books – that it could legislate to force all firms to take part in the initiative.

“The pensions dashboard will become a vital tool to help consumers, and their advisers, manage their pension pots,” said Fiona Tait, pensions specialist at Royal London. “It will provide, arguably for the first time, a comprehensive and clear picture of a saver’s current financial position, which will help them to create a realistic plan for their retirement.”

The dashboard has been on the fringe of the industry agenda for years as the task of keeping track of savings pot has become harder.

With 11 different jobs over the average working lifetime, according to the Department of Work and Pensions (DWP), the number of pots can mount up rapidly, even before personal pensions and Isa accounts are added on.

That could mean paying more in charges than necessary, failing to spot poor investments and even losing track of pension pots entirely. The DWP has estimated that some £400 million is lying in unclaimed pension savings.

There are several good reasons for consolidating different pension pots, said Carl Melvin, managing director of Affluent Financial Planning in Bridge of Weir, who highlighted key issues on which to focus – performance and risk, cost and flexibility.

Reviewing your pensions is far easier when they’re in one place, he pointed out, especially when it comes to checking how they’re performing.

“Many older pension funds are invested in poor performing funds and provide consistently poor returns over many years,” said Melvin. “Highlighting this can raise questions about whether the existing fund held remains appropriate.”

Performance should also be looked at in the context of the risk you’re prepared to take.

“Is performance good or bad not only in relation to the benchmark but in terms of risk too? Also, many so-called balanced funds are higher risk than the investor may believe.”

The eventual pension pot you get is also influenced by the charges you pay. The hidden charges on pensions and investments make the true costs difficult to work out, but plans taken out in the past 15 years are typically cheaper.

“Many legacy pensions are costly, so perhaps a new pension arrangement may offer better value,” said Melvin. “It’s a bit like modern PCs – they cost less and perform better than their equivalent computers from years ago.”

Flexibility is vital too, especially in the age of the so-called “pension freedoms”. Newer plans offer more options than “legacy” pensions, noted Melvin, including greater fund choice, online access and penalty-free transfers.

“A modern pension can offer incredible flexibility to meet your needs now and in the future – so a future-proof pension may be better than a legacy plan,” he said.

Consolidating your different pensions can have its complexities, however, which makes it vital to take professional advice if you’re able to afford it. Older pensions may have hefty charges for transferring out and contain benefits such as guaranteed annuity rates that are worth keeping.