Have you had several employers so far during your working life, leaving you with a number of different pensions?
You are not alone.
When auto-enrolment (AE) into workplace pensions was introduced in 2012, it was a master stroke: the so-called ‘pensions apathy’ that kept us from joining our company pension scheme was suddenly turned on its head, and made to work in our favour.
Now, if we were earning at least £10,000 and were at least 22, we were automatically enrolled into the company scheme, and our apathy meant we mostly didn’t bother opting out again.
It was a win-win situation: we were saving for our retirement, and the government had less people depending solely on the state pension at the end of their working lives.
However (and there’s always a ‘however’, isn’t there?) working patterns were changing in a way that made life complicated for those of us who had been auto-enrolled.
Whereas the baby boomers (born 1946-64) had tended to have only one or a few employers in their lifetime, the newly-arrived millennials (born 1981-96) started bopping around from one employer to the next like a bunch of demented squirrels on speed.
Their office chair was hardly warm before they were off again.
In fact the Department for Work and Pensions said that today it’s quite normal, as a millennial, to have around 11 employers in your life.
The problem, they added, is that this could mean 11 small pensions, one from each job, each worth an average of £4,000. Many are even smaller - ‘micro-pots’ of just £100 or so.
Management fees on smaller pots can quickly erode their value, so that your time at one particular company could, in terms of retirement saving in your workplace pension, have been time wasted.
New legislation means that small pots of less than £100 cannot be run down by costs, but such small pots are of little value in the bigger picture of your retirement planning.
This brings us to the notion of ‘pension consolidation’, combining smaller pots into one large one, and thus making the fees tolerable.
Now, while this is often a good move for defined contribution pensions (the Daily Telegraph quotes industry reports saying that nine out of 10 DC pots would do better if consolidated), it is often the wrong move for final salary pensions, which may perform much better for you if left alone.
Because the final salary pension provides an income linked to your final salary and number of years of service, it is a generous pension that will almost certainly do better for you if not folded into a general pot.
If you are, nonetheless, thinking of consolidating a final salary pension, it should certainly be discussed with an independent pensions adviser, before any action is taken.
Another advantage to consolidating suitable pensions is that older pensions had steeper fees, and a simple consolidation can save you money on charges. The experts say that if you are paying more than 1 per cent in fees, you are almost certainly paying more than you need to.
If you are considering merging or consolidating some of your pensions, you also need to have us check if there will be exit fees to transfer out of any of your existing pensions. Often, high exit fees can mean that the costs outweigh the benefits.
The problems emerging from this disparity between auto-enrolment and our high job mobility is summed up well by the small pots working group in Nest, one of the larger pension schemes.
They fear that burdening ourselves with a string of small pension pots will lead to our savings being eroded due to charges, scheme members losing track of some of their workplace pension savings, a disincentive to save and plan for later life, and high costs and inefficiencies in the pensions system.
Do you have a number of smaller pensions you think could benefit from being consolidated into one larger one?
We can help you achieve that in a safe, easy and efficient manner.
:: Michael Kennedy is an independent financial adviser and pensions specialist and can be contacted on 028 71886005. Further information on Facebook at Kennedy Independent Financial Advice Ltd or at www.mkennedyfinancial.com
