Getting your different pensions into one pot might seem daunting, but a simple SIPP really can take the headache out of pension saving.
SIPPs are often perceived as complicated beasts. Offering seemingly unlimited investment options, they can sometimes come across as the preserve of wealthy, confident investors, who relish the research and the thrill of buying and selling.
However, a SIPP can also be a practical solution to problems faced by huge swathes of people who may not be quite so engaged or interested in investing.
Jobs no longer last a lifetime – job-hopping is the norm and now millennials can expect to have an average of 12 jobs during their working life. And with auto-enrolment signing up eligible employees as soon as they start, that means it’s easy to end up with lots of different pensions.
If it was only a short-term or fleeting job, many of those pensions could be pretty small and easy to lose sight of.
Keeping on top of numerous different pensions can be an administrative headache. And with the long-awaited pensions dashboard – that will enable retirement savers to view all their different pots in one place – still a way off, it’s hard to know where you stand.
You may well have no idea how much you have saved in total towards retirement, where you money is invested, or which pension company is running which scheme.
In addition to the confusion that goes alongside multiple schemes, there is also a cost.
Cut your pension charges
Economies of scale apply to pensions too, and the charges associated with running one larger pot should be much lower than the multiple fees for managing lots of little ones.
Fees for running older-style pensions can be high. As a guide, anything north of 0.75% of your pot would be considered expensive.
You may also face additional ‘inactivity’ fees for old workplace schemes that you’re no longer paying into (known as dormant pensions).
Over the years these fees will slowly erode the value of your pot and place a real drag on your investment returns.
However, by transferring one or more pensions into an online SIPP, it’s possible to reduce these charges. Charges for online SIPPs will still usually be calculated as a percentage of your pot but may be tiered according to its size. As a guide expect to pay in the region of 0.2% to 0.5%.
This isn’t the only charging option, though. Some SIPPs, interactive investor included, charge a flat-fee instead. This means you pay the same fee, whatever the size of your pot. This approach makes more sense over time as your charges won’t rise the bigger your pension gets.
You might not think a percentage point here or there is worth quibbling over, but the power of compounding means that over your pension’s lifetime, it can make a huge difference.
Take the example of a £150,000 old-style pension charging a fee of 0.75%, with ongoing contributions of £200 a month. According to number-crunching by the Lang Cat, our pension holder could save around £20,000 in fees over 20 years, simply by transferring to an ii SIPP with flat fees.
The compounding affect of those fee savings means that your investment growth could be significantly higher if you transfer to a platform with flat fees. You could boost your investments by around £60,000 after 20 years (based on a £150,000 transfer, £200 ongoing contributions and previous fees of 1%). That’s because the fee savings will snowball over time as the extra money in your pot is able to generate additional investment returns each year.
The fees saving on smaller pots naturally won’t be quite so large, but they could still be significant and prevent unnecessary charges eroding your pot.
Things to think about
The benefits of holding all of your retirement savings in one place in combination with sizeable cost savings can make a transfer look like a no-brainer. Nonetheless, there are other considerations you need to make. For example, you need to be sure that by leaving one pension you aren’t giving up valuable benefits.
Before you make the decision it’s a good idea to check the following:
- Is your new pension definitely cheaper?
- Are there any hidden charges? You may have to pay to exit your old pension
- Will you lose any guaranteed annuity rates (GAR)? GARs offer you a rate on an annuity that is likely to be significantly higher than rates available on the open market
- Are you invested in a with-profits fund? These funds pay bonuses that would be lost if you left the scheme
Benefits like GARs are more commonly associated with older pensions from the 1980s and 1990s. Nonetheless it’s always a good idea to check what the consequences of exiting any pension before you switch.
It’s also important to note that it won’t be possible to transfer all pensions into a low-cost SIPP.
Can all pensions be consolidated into a SIPP?
Although it’s straightforward transferring defined contribution (DC) pensions into SIPPs, an altogether different conversation is required for defined benefit (DB) pensions like final salary or career-average schemes.
These workplace pensions pay members a guaranteed income in retirement that is based on their salary and the number of years they were in the scheme.
If you have a private sector DB scheme or a funded public sector scheme (like the Local Government pension, for example) you may be able to transfer it into a defined contribution pension such as a SIPP.
However, in transferring out of a DB scheme, you are giving up a guaranteed income in retirement. This means you’ll have to take responsibility for investing that money and eventually turn it into income yourself. For this reason, the Financial Conduct Authority, insists that if you have a transfer value over £30,000 you must seek financial advice before you leave the scheme. Transferring out of DB pension can make sense, in a small minority of cases, but for the vast majority of people, a transfer won’t be recommended.
It's also important to note that if you are in an unfunded public sector pension, such as the NHS Pension or the Teachers’ Pension, you won’t have the option to transfer out.
If you are looking to transfer a DB scheme into a SIPP, the provider is likely to insist on evidence that you have taken financial advice and that a recommendation has been made.
Consolidating your pensions
It should be pretty straightforward transferring one or more DC pensions into a SIPP. However, it may take time.
Once you have checked the details of your existing pensions and are happy that consolidation is the right approach, you need to open a SIPP account. Or, if you already have SIPP, you can use that account.
You then need to request a transfer and provide your SIPP provider with details of the pensions you want to move. It should manage the process for you, however, you may need to sign some paperwork to give your old pension provider(s) permission to release your pot(s).
Depending on how quickly the various companies operate, the transfer should complete in between six and 12 weeks.
During this time you will need to consider where you want your pension to be invested. This needn’t be daunting – although you can choose multiple investments you can pick just one and most platforms will give you lots of guidance and include recommended funds to get you started.
Check out ii’s Super 60 hand-picked funds for some ideas.
It is possible to hold your new SIPP alongside an existing workplace pension. Alternatively, if you want to keep everything in one pot, some employers may agree to pay contributions into your SIPP instead.
If you aren’t sure whether it makes sense for you to consolidate any pensions into a new SIPP, it’s a good idea to get independent financial advice.
Also, if you are concerned that you have lost some pensions you can use the government’s pension tracing service to track them down.
Important information – SIPPs are aimed at people happy to make their own investment decisions. Investment value can go up or down and you could get back less than you invest. You can normally only access the money from age 55 (57 from 2028). We recommend seeking advice from a suitably qualified financial adviser before making any decisions. Pension and tax rules depend on your circumstances and may change in future.