Auto-enrolment – when a workplace automatically enrols you in a private pension and it is up to you to opt out if desired – is useful in many ways. For younger workers or those who might have put off setting up a pension fund, it gets people off to a good start when saving for their retirement. However, if you are already paying into a personal pension, this can make retirement planning more complicated.
This is even more of a problem if you have worked for multiple different employers throughout your career – in fact, the BBC reported that the average UK worker will change employers every five years (1). It is becoming common, therefore, for people to have several small pension funds.
Having so many old workplace pensions means your retirement planning could be difficult to keep track of, and it is less easy to consider your overall pension options. It is also possible that some of your pension funds may be performing poorly or be subjecting you to unnecessarily high charges. Finally, lost pensions are a big problem. According to the Pension Policy Institute, 1.6 million pensions – a sum of £19.4 billion – are unclaimed (2). Pension consolidation can potentially avoid this problem.
Fortunately, it is now fairly simple to transfer your pension from one fund to another. This can be particularly useful if you have been paying into a personal pension for only a short period, perhaps after getting a new job. You may be able to withdraw the amount in the form of lump sum cash, or potentially move it into another personal pension.
Combining your pension funds into fewer pots or even just one private pension has become increasingly popular. As well as helping your retirement planning, this makes it easier to check on your investment’s performance. Pension consolidation also allows you to think carefully about which pension options are right for you. You may have more choice about the fund you invest in, and you should be able to choose a scheme that lets you avoid high charges.
A self-invested personal pension (known as a SIPP) might also be an option, especially if you are already confident with investing. This allows you to invest in a wider range of sources including the stock market. A SIPP is also flexible, and portable, meaning that you can often take it from one employer to another. However, it might not be suitable for all, they can be riskier, particularly if you have no experience in financial investment and you should take advice from an Independent Financial Adviser if you wish to set this up.
Stick with the workplace pension
A word of warning: always stick with your current workplace pension if you have one. The reason is simple – you are not the only one paying in! Your employer’s contributions add up to a significant amount, year by year, and are a great boost to your pension fund overall. Once you have left this employment, you can, of course, transfer this pension pot to a new private pension.