Moved jobs a lot? Here’s how to manage all those pension pots

JOB-hopping is an occupational hazard in a modern world where workers no longer have the luxury of staying with the same employer for life.

Official figures suggest most workers will change employer 11 times during their lives. While this might reinvigorate a career and salary, it has created a practical wealth challenge: how to deal with the haphazard collection of pension pots picked up along the way.

Even if you have kept track of all of them, there is the dilemma of what to do next. Do you keep them separate or simplify arrangements by merging them all into one (hopefully) big hoard?

POOLING PENSIONS CAN BOOST RETURNS

SWEEPING your pensions diaspora into a single home makes it all simpler to manage. You can keep an eye on performance and charges, and it could help set you on the road to a comfortable retirement.

Ed Monk, associate director at investment house Fidelity International, says: ‘Knowing the size of your total pension savings means you can take positive action if you feel you are under-saving.’

It also allows you to manage risk more easily. He says: ‘You can ensure you are not overexposed to one stock market or type of asset.’

You might have some old-style pensions with high annual charges steadily eating away at your wealth. These fees can be 3 per cent or even higher, whereas the fees on modern plans tend to be less than 1 per cent.

Tom Selby, senior analyst at fund platform AJ Bell, says: ‘High charges can wipe tens of thousands of pounds from the value of your pension fund over the long-term.

‘Getting all your funds in one place with a low-cost provider can therefore have a hugely beneficial impact on your quality of life in retirement.’

Another reason to wave goodbye to older plans is that they often have limited flexibility in terms of investment choice. Selby says: ‘Modern pensions offer a wide range of investments to suit all risk appetites. Many providers also design “ready-made” portfolios for people who don’t want to pick their own investments.’

CHOOSE WHERE TO CONSOLIDATE POTS

ONE option is to bring all your pensions together in one of your existing arrangements, such as a scheme you are currently contributing to through your employer. The alternative is to set up a personal pension with a new provider.

Fidelity’s Monk warns savers to think twice before stopping contributions into a workplace scheme. He says: ‘If you are working and contributing to a workplace pension, it is almost certain your employer is paying in something too. If you stop contributing, and so are no longer an active member, this valuable benefit will end.’

Another attraction of staying with a workplace pension – or using it to accommodate all pots – is that fees are usually lower due to economies of scale. And those who opt to save in a scheme’s ‘default’ fund have their charges capped at 0.75 per cent a year.

For anyone who has an old defined benefit pension, where retirement income is based on a mix of years worked and earnings, it is usually safest to leave it intact.

WATCH OUT FOR HIGH EXIT CHARGES

PENSION freedoms introduced four years ago led to exit charges from a pension being capped at 1 per cent. But the rule applies only to those aged 55 or over. Younger savers will need to ask their provider what escaping will cost.

Jessica List, technical manager at pension specialist Curtis Banks, says: ‘Exit charges can be higher the earlier someone transfers out of a pension. Therefore younger savers may be more at risk.’

Even if a pension applies high exit charges, it might still be worthwhile switching to benefit from a scheme with lower charges over the long term.

HOW TO MANAGE THE TRANSFER

SAVERS normally have the option of transferring a pot as cash – by selling the investments in the existing pension and then buying investments again in the new scheme.

Alternatively, they can choose to do it ‘in specie’ – moving the actual assets from one provider to another. List says: ‘In specie transfers often cost more and take longer. And they rely on the new provider being able to hold the assets.

‘But if a saver is concerned about coming out of the stock market, or has an asset they want to keep, it can be worth considering.’

BEWARE OF GIVING UP VALUABLE PERKS

OLDER pensions, especially those sold in the 1990s, often offered juicy extra benefits. If this is the case they should not be given up lightly. The benefits included guaranteed annuity rates (lifetime income) that far exceed those available today.

Some provided the ability to take more than the usual 25 per cent tax free lump sum from a pension pot and the right to take the pension earlier than normally permitted.

DON’T WAIT FOR THE ‘DASHBOARD’

THE Government has been urging providers to introduce pension ‘dashboards’ to allow savers to keep details of all their pensions in one place. They are finally due to be phased in over the next four years.

The initial dashboards will only have access to data from schemes that provide it voluntarily, which limits their usefulness.

Selby warns: ‘Even when they are fully formed, dashboards will not be transactional. So if you want to benefit from lower charges and greater flexibility you’ll need to take action to merge any pots yourself.’

OVER 55? MAYBE CASH IN A SMALL POT

OVER-55s or those retiring earlier due to ill health might be tempted to cash in small pension pots, instead of bothering to switch, which is permitted under so-called ‘trivial commutation’ rules.

List urges caution on this. She says: ‘Cashing in triggers the money purchase annual allowance rules, which limit how much you can go on to save in a defined contribution pension each year from £40,000 to just £10,000.’

She adds: ‘It is sometimes possible for people to take the money out of a small pension of less than £10,000 without triggering the rules. But not all providers offer this facility or use it automatically.

‘Consolidating a small pension may be a better option.’