Shape up your finances: How to consolidate your pensions

Organising our pensions is one of the best ways we can whip our finances into shape. Consolidating your pensions in midlife is a powerful way to better invest and controur retirement funds and plan for your future. When you consolidate your pensions, you make admin easier, it becomes easier to track (and improve) your returns … you may even find a long-forgotten store of money. This easy guide to pensions, sponsored by AJ Bell Money Matters, will help you finally get yourself sorted!

“It’s particularly important that women prioritise their pensions as they tend to live longer than men so you’ll have to eke out your pension pots to make them last for longer,” says Laura Suter, director of personal finance at AJ Bell.

At the Queenager stage of life it’s important to assess and organise your finances for the future to give yourself the best possible chance of a secure retirement.

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Saving into a pension and keeping track of its performance is the single best way to give yourself financial freedom.

Life events that may have reduced your pension

One reason that women in midlife need to spend time organising their pensions is the gender pay gap. This is the gap between the average earnings of men and women and it has a big knock-on effect on our pensions. When women earn less than men over the course of a lifetime, that means they have less money to contribute to their penions, even if they’re putting in the maximum allowed.

Your pension pot may also have been affected if you stopped or reduced your contributions because of pregnancy, maternity leave or caring responsibilities. Which? has reported research that shows mothers can miss out on pension savings of nearly £92,000 when they work part-time until their child begins secondary school. If you left work entirely during that same period, you could have a shortfall of £183,000.

That’s why it’s so important to get your pension savings in order.

Use this handy checklist from AJ Bell to help you get started.

Why should I consolidate my pensions?

“After your home, your pension is likely to be your biggest asset,” says Antonia Medlicott, founder and MD of pension and investment website investinginsiders.co.uk, a platform review site aimed at bringing more value to investors. “Not looking after that asset would be like letting your home fall into ruin – it will be worth less when you need it.”

Other reasons why consolidating your pensions is important include:

• Some pensions can come with higher annual charges which eat into your savings
• You can evaluate and choose better performing investments
• It enables you to pick investments that align with your personal values
• Having one pot to track cuts down on your admin

Unclaimed Pensions

Maybe you’re someone who has been paying into pension pots throughout your working life. And maybe you’re one of the average people who has 11 jobs throughout their lifetime. In which case you could feasibly have opened a pension in each of those jobs, so it’s perfectly possible that along the way you’ve lost track of your hard-earned pension savings.

That means you could be missing out on the benefits of consolidating your pots of pension cash built up in jobs gone by, to secure the retirement you’ve always dreamed of.

It’s staggering that £50 billion lies in unclaimed and forgotten pensions in the UK, according to economic consultancy Centre for Economics and Business Research. And when the average value of a forgotten pension is £16,004 if you’re between 55 and 75, it’s very definitely nothing to sniff at.

That’s why consolidating your pensions should be at the top of your future finances to-do list.

How to consolidate your pensions

Step 1: Find your missing pensions

You can use the government tracing service to track down lost pensions and find the contact details you need to locate your savings. You’ll need either your old employer’s name or the name of the pension provider. Use your LinkedIn record of jobs or a copy of your CV to prompt your memory.

AJ Bell also have a free pension finding service.

Step 2: Pick where you will consolidate your pensions

Once you’ve tracked down your old pensions, contact your new provider so it can look after the transfer for you. You can also consolidate your old pensions using a provider like AJ Bell or other companies. Check out the type of investments they offer, fees associated with transactions, customer service and ease of use.

If you have a defined benefit pension, also known as a final salary scheme, you’ll need to take regulated financial advice before transferring your money. (See more about in our section below, When is consolidating not a good idea?) Ask your old provider to tell you what type of plan you have.

Step 3: Choose your pension plan and investments

There are two types of pensions you can choose from; a Self Invested Personal Pension (SIPP) and a personal pension.

“A SIPP is the most flexible type of pension,” says Antonia. “The onus is on the pension saver to choose how their money is invested.” SIPPs have a huge range of investments to choose from, including stocks and shares, and you can invest in as many as you like.

If you’re not a savvy investor or want to start slow, you can invest in a ready-made plan managed by experts. You usually pick from 3 or 4 plans that differ depending on whether you’re cautious or adventurous, such as AJ Bell’s Ready-made pension.

Or you might prefer a personal pension. These offer less choice (you don’t choose individual stocks and shares) and you only save into one investment.

When making you choice you should compare:

• Fees and costs associated with running the pension.
• How well it’s performed over time.
• Benefits and features attached to the pension.

You can do this yourself or enlist a financial adviser to do it for you.

Step 4: Align your pensions to your values

By the time we’ve reached midlife, we’ve worked out what’s important to us beyond our own happiness and that of our family. These values can affect and influence your investment choices.

Over recent years, there’s been a rise in ethical investing, which takes into account the environmental, social and governance criteria (ESG) of the companies invested in. Bloomberg Intelligence has reported that ESG assets invested are on track to top $53 trillion (£41 trillion) by 2025, and Female Invest reports that 71% of women invest with wider sustainability in mind.

A SIPP is your best option if you want to choose ethical investments. You have complete autonomy over how your money is invested, and SIPP providers provide guidance on how to invest ethically, like this article from AJ Bell.

Step 5: It’s not too late to start saving – or save more – now

Before auto-enrolment in pensions was introduced in the UK in October 2012, not all of us did. If that’s you, don’t stress. It’s never too late to start.

According to AJ Bell, even if you start paying £200 a month into a pension at the age of 40, you would have a pot worth £150,000 by the time you’re 65 years old, assuming your savings grow 5% a year and basic-rate tax relief. When you combine your pensions into one pot, it’s the perfect opportunity to continue adding to it. Even a small monthly payment can help.

When is consolidating not a good idea

While there are real benefits to consolidating pensions, some pension plans have benefits that you could lose if you transfer your money out. These might include the promise of a fixed rate of income from your pension for life.

If you’ve got a defined benefits pension, referred to enviously as a ‘gold-plated pension’, it may not be a good idea to take your money out. In these plans, the provider carries all the risk and guarantees to pay you a fixed income for life. Take financial advice before losing these valuable benefits.

It’s not wise to cash out of your current workplace pension either. You’ll lose valuable monthly contributions from your employer.

Ready to combine your pension pots into one. Transfer here on AJ Bell with a step-by-step guide.

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Thanks to our partner AJ Bell Money Matters, focussing on financial provision for women in midlife