If, like many people, you have moved jobs over the years and accumulated two or more occupational pensions, now is a good time to think about bringing them all under one roof.

As well as allowing you to work out how much is in your pension pots and where they are invested, by consolidating them into a single pot you can manage them more easily.

In this article we’ll show you how to go about this process and what products are available to do the ‘heavy lifting’ for you and make the journey stress-free.

TAKE CONTROL

Since the introduction of automatic enrolment in 2012 more people have been paying into company pension schemes, which is obviously a good thing, but it does mean anyone who has changed jobs more than once since then – which probably covers the majority of people currently in work – is likely to have more than one pension pot.

As well as being time-consuming keeping tabs on these different pots, if you lose track of one of your pots you could miss out on money which you have been relying on to part-fund your retirement.

According to the pensions industry, the amount of money in ‘lost’ pensions is almost £27 billion, which is quite shocking, but there is an official online pension tracing service to help you if you think you have a lost pension.

Although the government promised to set up a ‘pensions dashboard’ to help those with multiple pensions manage them all in one place, this has yet to become a reality, so at some point you will need to decide whether to keep all your pension pots separate or bring them all together in one place.

BUILD UP A CLEAR PICTURE

Before you do that, you need to know how much they are worth, whether they are being managed well, how much they are costing you in fees and whether there are any special clauses attached.

It is likely one of your pots has performed better than the others, and you may be tempted to move everything into that pot and be done with it.

However, you have to remember past performance is no guide to what will happen in the future so you should take a step back and weigh up each investment on its own merits rather than rushing into a decision.

You may find your pensions are invested in lots of different assets, not just shares but also bonds, tracker funds and funds of funds, so making a list of what is in each one should be your starting point.

You may also find your investments are spread far and wide geographically, which could be a good thing in terms of diversification but could be a bad thing if your money has been invested in poorly-performing markets.

Taking the time to understand how and where your pensions are invested will give you a fuller picture of your finances.

Then there is the question of costs – having three or four small pots rather than one large one means you are probably paying more than you need to in management fees as most firms charge less the more money you have in your pension.

Having all your money in one place also makes it easy if you decide you want to change the amount of risk you are willing to take.

Most people become more risk-averse as they approach retirement, as they don’t want to risk their capital, so they begin shifting their investments towards less speculative and more secure assets, in many cases selling high-flying stocks and buying bonds with a steady income instead.

Finally, having one larger pot rather than three or four smaller ones will make it far easier for you to manage and eventually to draw your pension when the time comes.

WHY BIGGER IS BETTER

We touched on the issue of costs, and the table shows the difference consolidating your various pots into one place can make in terms of reducing the ‘drag’ from annual management fees.

Say you had four pots each worth £15,000 and you paid an average of 0.75% in management fees each year.

AN ILLUSTRATION OF THE BENEFIT OF CONSOLIDATING PENSION POTS 

READY-MADE SOLUTIONS

There are some ready-made services on the market to help you consolidate your pensions in one place, and some – like the AJ Bell Ready-Made Pension – even offer to track down lost pensions for you.

The service also offers the ability to put your newly-consolidated pension into a range of four funds managed in-house with varying degrees of risk according to how aggressive you want to be in growing your pot, all with the same 0.45% management fee.

All your future pension contributions will be collected and invested automatically in your chosen fund, with the freedom to switch funds at any time.

For now, this service is only available to customers who are new to AJ Bell not existing customers.

Assuming each pot earned a gross return of 5% per year, after five years they would be worth £17,559 each or £70,236 in total and you would have paid £2,448 in fees.

However, if you had consolidated all four pots into one with an average annual management fee of 0.5%, after five years your pension would be worth £71,125 and you would have paid £1,640 in fees.

The difference is even more stark if you leave it 10 years or 20 years to consolidate your pots, as the table shows.

Similarly, a higher rate of return would mean your four smaller pots paying more fees in total than a single larger pot.

REASONS FOR NOT CONSOLIDATING

There are some circumstances where consolidating your pensions may not be a good idea, for example if you have a defined benefit or ‘final salary’ pension.

These provide a guaranteed income for life, which could be worth a great deal more than a defined contribution pension, where you just get a finite amount of money, so you need to think carefully before giving one up.

If you have a defined benefit pension worth £30,000 or more, you must seek regulated financial advice before transferring it otherwise your chosen pension provider will not be able to help you consolidate it with your other pots.

Also, some pension schemes offer a guaranteed annuity rate, which allows you to buy an annuity offering a much higher income than you would otherwise get from a defined contribution scheme, so you need to check the fine print to see if any of your pensions contain such a clause.

It would also typically not make sense to move funds out of a workplace scheme where an employer was actively making contributions. 

TURNING TO A SIPP

One option if you’re looking to consolidate several pensions is to use a SIPP (self-invested personal pension) as the vehicle. This typically brings a far greater array of investment options than other types of pension. Your next step is to research the investments made available by the SIPP provider in order to build a portfolio resilient enough to grow your wealth and protect your savings from unexpected shocks. If you don’t have the time to follow individual companies you could lighten your research load by leaving the stock picking to the professionals.

So-called ‘one-stop-shop’ funds provide you with everything you need in one product and tend to be multi-asset, which means they own shares and bonds, and often commodities or property. Examples include F&C Investment Trust (FCIT), the ultra-diversified long-term capital growth and income fund invested in more than 400 companies spanning 35 countries, which has increased its dividend for 53 consecutive years. Another core equity holding that delivers a real long-term return through capital growth and a rising dividend is the diversified Alliance Trust (ATST).

Actively managed funds with a UK equity focus that could act as core holdings include the likes of BlackRock UK Special Situations (B3V1C06), diversified across 69 individual holdings, or the multi-cap Man GLG Undervalued Assets (BFH3NC9), which benefits from the manager’s disciplined valuation approach. Once you’re up and running with a carefully constructed core of funds, you can begin to select a few individual stocks and more eclectic funds as satellite holdings to keep things interesting.

You could speedily construct a diversified portfolio through ETFs (exchange-traded funds), which trade on exchanges, generally tracking a specific index, investment style or theme and levy lower charges than funds and investment trusts. One example is the Amundi Prime Global ETF (PRIW), which tracks the performance of the Solactive Developed Markets Large- and Mid-Cap Dollar Index but is priced in sterling and has a competitive annual fee of just 0.05%. [JC]

DISCLAIMER: Financial services firm AJ Bell referenced in this article owns Shares magazine. The author (Ian Conway) and editor (Tom Sieber) own shares in AJ Bell.

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