The Consolidator's Guide to Workplace Pensions

Published: 3 October 2018

Consolidating pension and investment pots into one place can make it easier to understand and keep track of your potential future wealth. It could even save you money in charges. But is it right for you?

Our consolidator’s guide articles aim to help you decide, by looking at the practical ins and outs of consolidating different types of savings pots, from personal and workplace Pensions, to ISAs and investment accounts.

Government sources suggest the average worker has 11 jobs during their working life1, and many will have opened pensions with at least some of those employers.

No wonder, then, that an estimated four in five people lose track of one of their pension pots2. And we might reasonably expect the numbers of lost pots to rise in future too, as more and more people are now auto-enrolled into workplace pension schemes.

Avoiding losing track of valuable benefits is one practical reason for considering consolidating workplace pension pots, but there other issues to bear in mind too. Here we look at some things to think about when deciding whether consolidating Defined Contribution (DC) workplace pensions to a single platform like Alliance Trust Savings might be right for you:

What is a DC workplace pension?

DC pensions, sometimes known as Money Purchase pensions, are the type of pension you are most likely to be saving through in the workplace today. What you get back from a DC pension is not guaranteed and it’s affected by what’s paid in and investment performance, as well as factors including charges.

The other type of pension you might have in the workplace is a Defined Benefit (or final salary) pension. With this type, what you get back is guaranteed – based on your earnings and how long you work for the sponsoring employer. The ins and outs of potentially consolidating one of these are covered in a separate article.

Why should I think about consolidating my DC pensions?

Because what you get back isn’t guaranteed, it’s essential to manage your DC pensions as effectively as possible – not an easy undertaking when they’re scattered all over the place.

Being able to view all your pension savings in one place can help provide a clearer, more accurate view of them. It can also make it easier to compare how different investments are performing and to consider your options when the time comes to start taking your money out.

If fact, it’s worth checking on the retirement options each of your DC workplace pensions offer, as these may be limited in some cases. So, you might need to transfer out and/or consolidate in to another pension if you want more flexibility at retirement.

If you’re in a contract-based workplace DC scheme (we explain below) it’s also worth checking the charges you’re paying as you may be able to reduce those by moving elsewhere. Moving can also be a good opportunity to ensure that all your pension investments are consistent with your objectives and appetite for risk.

Does the type of DC workplace pension I have make a difference?

Yes, it can. There are some important differences within the range of DC workplace pensions. For example, you’ll either be in what’s often known as a contract-based scheme (where your pension contract is with a third-party pension provider), or a dedicated Occupational Pension Scheme set up by the employer and governed by its own Board of Trustees.

Some pension schemes will have different rules to others. Occupational Pension Schemes in particular may have trust deeds that provide members with extra benefits. They are also more likely to have restricted retirement options, so it’s always worth checking for any additional benefits or restrictions before making decisions.

Newer arrangements such as Master Trusts – Multi-Employer schemes - may have different advantages to keep in mind, such as lower charges.

What in particular should I look out for?

Certain plans might contain valuable safeguarded benefits that will make you think twice about transferring out. For instance, some older DC pensions offer guaranteed annuity rates (GARs) that promise incomes of a set percentage of your pot at retirement a year. There can be guaranteed growth rates too, and in some cases there may be a clause allowing you to take more than the usual 25% tax-free lump sum.

Alternatively, you may be in a scheme that doesn’t offer all the possible income options you could potentially choose from at retirement. It’s up to pension scheme trustees to decide what to make available. So if you definitely want options such as flexible drawdown or uncrystallised funds pension lump sums (UFPLS), check they’re either offered by the scheme you’re already in, or the one you’re considering consolidating into.

You can find out more about your potential income options at retirement in our Guide to Accessing Your Pension Savings.

Also be sure to compare the costs and investment options offered by your prospective new pension with those on your existing arrangement. If the latter is cheaper, or it has more investment choices, you’ll want to be clear that the gains from transferring are worth it.

Do investment choices vary?

They can do, although the majority of workplace DC scheme members are in default investment arrangements3 and may not know exactly where their pension contributions are invested. If that includes you, defaults may be welcome if you don’t want to engage with your pension investments, but the investment range can be limited and may not remain as suitable for you as it could do, should your circumstances and needs change over time.

If you do want a say in your pension investments, more flexible workplace pensions and non-workplace options (such as Personal Pensions and SIPPs) may be more appealing as a place to consolidate.Whatever pension you have, make sure you understand what you’re invested in and what you’ll replace it with if you move.

What if I’m still working for an employer I have a DC scheme with?

Employer contributions are, where provided, a big attraction of workplace pensions, but you would lose those extra payments if you transfer out. So if you’re still working and your employer is topping up your workplace pension contributions, there’s a good case to stay put and continue benefiting from those extra payments.

You may also find your pension has life insurance built into it whilst you are still with your employer, or include a waiver of premium benefit (which means your pension contributions will continue to be paid in the event of being unable to work). Such benefits will likely be lost on transfer or replaced with less generous terms.

Will it cost me to transfer?

Some – usually old-style contract-based schemes – will levy a charge, so you’ll need to weigh up the impact this has on your fund against the benefits of going ahead with the transfer. Some pensions may be invested in with-profits funds. These funds often apply ‘market value reductions’ that take effectively take a slice off the amount you can take with you.

Should I take advice?

Ideally yes, especially with the level of detail that can be involved in pensions. If you have safeguarded benefits worth more than £30,000, the transfer will need to be signed off by a Financial Adviser anyway.

The fees paid for financial advice will add to the overall costs of transferring, but a good Adviser can help you save far more over the long run. They will be especially helpful when it comes to comparing different schemes and ensuring all your investments remain in line with your objectives, risk appetite and capacity for loss.

How do I find a financial adviser?

The Money Advice Service offers tips on how to choose a Financial Adviser. You can also find an Adviser near you through sites like www.unbiased.co.uk or www.vouchedfor.com

Summary

Once you’ve left a job, there can be good reasons for consolidating a workplace DC pension. But you should always take the time to check your facts first. Remember that pension transfers can be complex. You could lose valuable benefits in the process. So take professional advice if you are at all unsure whether consolidating is right for you.

Important information

This is provided for general information only and takes no account of personal circumstances. It is not a recommendation to buy or sell. It is provided solely to support you in making your own investment decisions. If you have any doubts as to their suitability you should seek expert advice. Alliance Trust Savings does not give financial or investment advice.

Laws and tax rules may change in the future without notice.

Please be aware that the value of investments can fall as well as rise so you could get back less than you invest.


1 Gov.uk, Pensions Latest Blog, Pension Tracing Service moves online, 10 May 2016
2 As above.
3 YourMoney.com, Sticking with default pension fund could mean £300k shortfall, 13 October 2017

Consolidate and save?

We charge you flat Account fees rather than fees based on a percentage of the value of your investment. Please see our Charges Guide for more information on Account fees.

So as your investments grow your Account fees won’t. If you consolidate from elsewhere you might be surprised just how much you could save.

See how our charges compare

Alliance Trust Savings Limited is registered in Scotland No. SC 98767, registered office, PO Box 164, 8 West Marketgait, Dundee DD1 9YP; is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, firm reference number 116115. Alliance Trust Savings Limited gives no financial or investment advice. ‘Alliance Trust Savings’, ‘ATS’ and 'AT Savings' are all brand names of Alliance Trust Savings Limited together with the ‘Alliance Trust Savings’ logo are owned by and used with the permission of Alliance Trust PLC, the previous owner of Alliance Trust Savings Limited.