Why Shouldn’t You Put All Your Pension in One Place ?
So, you’re planning to combine your pensions into one pot. But wait! There are potential downsides you should watch out for!
You’ve been working for almost half of your life, and that means you have many pensions hovering around. Let’s say, around 10 pensions at hand. These are in different types – it could be you arranged your own Self-Invested Personal Pension , or you have been automatically enrolled in the workplace or company pension scheme of your government.
Regardless of the case, you’ve been thinking of merging all your pensions to manage and keep track of them. Others like the idea of merging multiple pensions to open up more investment possibilities and save money if they need to transfer a lower cost scheme to a higher-cost one.
However, we say it is not a good idea at all. Why?
The reasons vary. Merging your pension pots could mean…
…throwing away early retirement options and tax-free opportunities.
Webb warns those who are planning to combine the pension pots that they could unwittingly throw away early retirement options (have access to the pension before turning 55 years old) and enhance tax-free cash (over 25 per cent pot tax-free).
…losing of valuable benefits.
Sold pensions carry a promise that the pot can be converted into a guaranteed income in retirement. And, these guarantees are highly valuable given to the decreased annuity rates in recent years. Although, it could potentially be lost if you transfer one pension into another.
…paying steep exit penalties.
Some pension schemes charge beneficiaries an exit charge if they move their money. This is true, especially those that began before 2001. Typically, this fee is a percentage of someone’s pension savings. But, it may come in a Market Value Reduction form if your pension is in a with-profit fund. According to past surveys and reports, some schemes tend to charge ten per cent or even more.
…not having any single chance to get small pot privileges.
This applies to people who still invest money and those who are affected by the lifetime allowance for pension savings . Basically, acquiring a pension counts against the lifetime allowance of a person, however, savers are allowed to take up to 3 small pots under £10,000. On the other hand, a £30,000 cash would be added if they keep small pots instead of merging them.
Another privilege that you could miss out is the deduction in the saver’s annual allowance from £40,000 to £4,000. We call this Money Purchase Annual Allowance (MPAA). Though this won’t apply for small pots, not more than £10,000.
Especially if you have a defined benefit or final salary pension scheme, combining all your pension pots is usually not a good choice, although it still depends on your case.
While not all of these risks can apply to everyone, it is still crucial and recommended to seek professional advice. Doing so will prevent costly mistakes from emerging. Unless you are confident that you fully recognize the benefits, risks, and costs involved.