You may have built up multiple pensions during your working life, particularly if you have changed employer several times.
This could mean you have a several individual pension schemes with different employers.
Having a variety of small pensions under separate management can make it hard to keep track of your funds and their performance and to calculate what benefits you are entitled to.
One potential solution is to consolidate your multiple UK pension funds into a single plan before you then make a transfer into a QROPS. The advantage of this is that it is much easier to track and monitor one fund rather than three or four. You may also save on management costs and you will have a single point of contact for your retirement provision.
The advantages of consolidating your UK pension pot:
One point of contact for all your pension enquiries
- Save time in terms of tracking and monitoring pension correspondence and performance
- Possible reduction in management fees as all pension money is under one roof – this is because some old-style pension schemes carry heavy management fees and ongoing administration costs, so it is important to check exactly how much you are paying for your pension
- Having to pay high ongoing fees means that the costs of admin will be eating into the potential profit you are making as your scheme grows and increases in value. This is particularly true of funds where the charges are not capped above a certain threshold of fund size.
- Easier to monitor and track – all your investments and funds are in one place and you know your pension net worth at any one time
- No change in tax status
- Simpler to see whether your funds will be affected by the cap on pensions earnings, known as the Lifetime Allowance
- Access to a wider range of investments – depending on the management of your current multiple pension schemes, you may not be invested in asset classes or products that are most suitable for you. Therefore, a good look at your individual circumstances and financial goals may reveal that you need a change of investment strategy
- Greater flexibility on how and where you take the proceeds from your pension fund – this is particularly important if you are living or working abroad, or if you are planning to retire in a country or jurisdiction outside the UK
- The security of knowing that you have control over your own money – this is particularly important for members of pension schemes which are in deficit and where the ability of the scheme to pay future pension members is in doubt
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Although there are a number of benefits in consolidating your multiple pensions, it is important to take advice because you may lose out by transferring out of certain pension schemes.
Potential drawbacks of transferring out of a scheme:
- If you are part of a final salary (defined benefit) scheme you may not receive the same benefits if you leave
- If you have a pension with guaranteed benefits these will no longer be available if you transfer out of the scheme.
- You will be taking on the investment risk yourself, instead of the final salary scheme trustees – if you leave a final salary scheme. Your existing scheme may guarantee a certain level of annuity payments which may be better than you could achieve in the open market.
- You may have to pay charges to leave your existing scheme, or your pension management company may impose a levy on your overall fund value. This is known as the Market Value Reduction and applies to pensions that are investment in With Profits funds.
However, if you are planning to transfer your multiple pensions overseas into a QROPS, then there are other benefits available which may offset the cost of consolidation. Individuals have different needs, assets and investment goals and that is why it is important to take professional advice.
Consolidation and QROPS schemes
Most QROPS pay a tax-free lump sum on retirement. Like UK-based pensions, there is no obligation to buy an annuity with a QROPS and you can draw down on the fund when you need income, although you will need to think about the tax implications of doing this.
With a QROPS, any money left in your pension fund when you die can be passed onto your heirs, usually free of tax. With a UK-based pension it depends how old you are when you die as to how the proceeds can be passed on. Whether you or your beneficiaries pay tax depends on your personal circumstances.
