Issues to consider - why you might not benefit
You need to take a number of factors into consideration when deciding if it is best to consolidate your pension plans as it can be very difficult or expensive to switch from some arrangements. You should carefully consider everything before consolidating your plans or not – and take appropriate independent financial advice if you are unsure.
You can earn loyalty bonuses in some pension plans that reward you for staying invested in the plan. Loyalty bonuses can amount to significant sums over several years and you should bear these in mind before deciding to consolidate.
Early termination penalties
You could face early surrender penalties if you decide to consolidate (or ‘switch’) your pension plans. Surrender penalties tend to be applicable in the first 5 years, so if you joined the pension plan more than 5 years ago there is a good chance that you would not have to pay an early termination penalty. However, some older plans may apply penalties throughout the policy term.
Guaranteed annuity rates
You may want to check whether your pension plan provides guaranteed annuity rates (GARs) rather than requiring the annuity bought to provide your pension on the open market when you choose to retire. GARs are most common for personal pensions started before July 1988, though are also a feature of some types of pension plans sold since then. A GAR may provide you with a higher retirement income than can be bought on the open market when you retire. While GARs may pay more income than other annuities, they may also have more restrictions. One of the most common is for the pension to be paid to the policyholder only, with no spouse’s pension and/or tax-free lump sum. This can make pension plans with GARs inappropriate if your spouse has no pension arrangements. Further, your pension may be offered only on a set date such as your 60th or 70th birthday. For some this might be too inflexible.
Integrated life cover/ Waiver of premium
Your pension policy may include benefits such as life cover or waiver of premium. These extra benefits should be taken into account when deciding if it is in your best interests to consolidate pension plans with such benefits into another plan. In reaching this decision, you should identify which benefits are still required given your circumstances.
Final salary pension benefits
It is generally not in your interests to transfer benefits out of a final salary pension scheme. Many final salary pension plans provide generous ill-health, early-retirement, spouse's and dependants' pensions on death, which are usually excluded in a personal pension such as a SIPP.
Remember that transfers from final salary plans (and indeed other types of pension) can take many months. Some company plans are also cutting transfer values where the company scheme is underfunded. This can substantially reduce the transfer value and make it uneconomic to switch pensions. If you have left your previous employer and become what is called a "deferred member", the same applies.
Barclays Stockbrokers does not accept transfers from Final Salary/Defined Benefit pension schemes.
Some pension schemes may charge a penalty if you transfer them from one provider to another. You can ask your existing pension provider to disclose the penalties and costs involved in moving your funds.
Size of pension funds
If the total value of your pension funds is relatively small, e.g. a few thousand pounds, it may not be worth consolidating your pension plans.