It is possible to have too much of a good thing – and that can include pensions.
Having a large pension pot is a very good idea – but having a large number of small pots most certainly is not.
Multiple pension pots are hard to keep track of, easy to forget about and even lose altogether.
It is becoming a real problem. At Continuum we are looking at ways to deal with multiple pots – and at how you can turn them into a comfortable retirement.
Why do we have multiple pension pots?
The government made pension saving automatic for employees in 2012 when they started making it a legal requirement for employers to set up and pay into schemes for their workers. This is auto-enrolment. Around 10.7 million people have been building workplace pensions thanks to the scheme.
Everyone over 22 and earning more than £10,000 a year now gets at least 8 % of their salary paid into a pension scheme – 5% from their wages and 3% from their employer.
But what happens when you change employers? Under the auto-enrolment rules you join a new scheme and start saving again. The money you have in an old scheme is still yours, and it will stay invested and hopefully growing. Over two million small pension pots are created each year as workers shift from one job to another.
Old pension pots are said to be ‘deferred’, meaning that you no longer actively contribute to them, although their contents remain yours. They are a growing problem as people change their employers more often than previous generations may have done – and auto-enrolment means that almost all of us may now have them.
The value of lost pension pots reached £26.6 billion in 2022, with the average lost pot worth about £9,470. Almost all of us are likely to have multiple pots by the time we reach retirement. Small deferred pots are a problem for pension firms due to the costs and inefficiency they cause – but for pension savers they are a potential disaster.
There are three problems:
- The first is obvious. You may have thousands in a pension pot that you have forgotten about. It could make a big hole in your pension prospects. It is surprisingly easy to forget about a pension plan from the beginning of your career. If you have moved home a few times the provider may have lost touch with you.
- The second is that having multiple pots makes them harder to keep track of. You probably don’t have the time to check the performance of several pension funds, especially as older funds can be anything but transparent.
- The third is the most serious. You pay a management charge on a pension fund each year. Older funds can have very costly charges –multiple funds mean multiple charges, all eating into the money that should be growing for your future.
Finding a solution
Merging your pots can make them easier to manage, easier to track and control – and mean your money can work harder.
Consolidating your old funds into a single, low-cost pension provider’s scheme or investment platform could boost the value of your retirement pot by thousands of pounds.
You should start by tracking down your workplace pension pots. The government has a free pension tracing service.
Then choose one firm and merge all your pots into it. It makes sense to find one offering good performance and the lowest charges. You will then need to take care of some paperwork to authorise transfers from the other providers.
But you may need some help. Getting an expert to track down old pensions and deciding which provider to consolidate with could make a big difference to the size of your final pension pot. You could also consider transferring to a self-invested personal pension or SIPP which lets you control where you invest your money.
At Continuum we are ready to provide all the expert help you need. If you have too many pension pots, call us today.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment or retirement strategy, you should seek independent financial advice before embarking on any course of action.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Pension income could also be affected by interest rates at the time benefits are taken.
The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.
The Financial Conduct Authority does not regulate taxation advice.