Should the self-employed combine their pensions?

As a self-employed individual, managing your finances can often feel like navigating a complex labyrinth, especially when it comes to planning for retirement. Many self-employed people have transitioned from traditional employment, accumulating various pensions along the way. These may include a mix of personal and workplace pensions, each with its own set of rules, charges, and investment options. One strategy to consider is consolidating these pensions into a single plan. This article explores the benefits and potential drawbacks of this approach, emphasising the importance of informed decision-making and professional advice.

Why consider consolidation?

Consolidating old pensions into one plan offers several potential benefits, each worth examining in more detail for the self-employed, who might be balancing multiple financial considerations.

1. Reduced costs

Multiple pension accounts often mean incurring several sets of fees. These can include annual management charges, administration fees, and potentially even investment advisory fees. By consolidating your pensions, you can streamline these costs because you’ll be managing only one account. This could translate into lower overall costs, thereby preserving more of your retirement fund. Over the long term, even a small reduction in fees can result in a significantly larger pension pot due to the compounding effect of savings.

2. Greater fund choice and investment options

Individual pension plans come with their own set of investment options, which can vary widely in terms of asset types and geographical exposure. Some older pensions might have limited choices or be invested in funds that no longer align with your current risk tolerance or investment philosophy. By consolidating your pensions, you might gain access to a more diverse array of investment options that can be tailored more closely to your financial goals and risk profile. This can be particularly advantageous if you’re looking to invest in newer, potentially more profitable markets or innovative fund types that weren't available when your original pensions were set up.

3. Simplified administration

Managing multiple pension schemes can be cumbersome and time-consuming. Each scheme has its own set of statements, policies, and contact points. Consolidation simplifies these administrative tasks, reducing the time you spend managing these accounts and decreasing the likelihood of errors or oversight. A single pension plan means one set of documents to review, one set of investment decisions to make, and one point of contact for all your pension-related queries. This streamlined approach can free up more of your time to focus on your business and personal life.

4. Enhanced visibility

Having multiple pension pots can make it difficult to get a holistic view of your retirement savings. By consolidating them into a single pot, you gain a clearer, comprehensive overview of your total pension savings. This visibility is crucial for effective retirement planning. It allows you to better assess whether you are on track to meet your retirement goals and make informed decisions about contributions and investments.

5. Access to valuable features

Modern pension schemes often come with features that older pensions might lack. Flexi-Access Drawdown (FAD) is one such feature, allowing you more flexibility in how and when you withdraw your funds. This can be especially beneficial for the self-employed, who may have more variable income streams compared to salaried employees. Other features might include the ability to choose from a wider range of investment strategies, access online management tools, and better death benefits options.

6. Strategic financial review

Consolidating pensions also provides a valuable opportunity for a thorough financial review. It's an ideal time to reassess your investment strategy, risk tolerance, and the overall approach to achieving your retirement goals. This strategic review can help ensure that your pension investments are aligned with your current financial situation and future aspirations. It allows you to make adjustments based on changes in the market, your business, or your personal life, ensuring that your retirement planning remains robust and responsive to your needs.

Potential drawbacks

While consolidating pensions into a single plan can offer numerous advantages, it's essential to also consider the potential drawbacks. Understanding these cons can help you make a more informed decision, particularly in light of the unique financial situations faced by the self-employed. Here are some of the main concerns:

1. Loss of valuable guarantees

Some pension schemes, particularly older ones, come with valuable guarantees that could be lost if the pension is transferred. For instance:

• Defined Benefit Pensions: These offer a guaranteed income based on your salary and years of service, providing a level of security that defined contribution schemes generally do not match.
• Guaranteed Annuity Rates (GARs): Some pensions have built-in annuity rates that guarantee a higher income at retirement than current market rates could provide. Transferring out of these pensions could mean giving up these favourable terms.
• Guaranteed Minimum Pensions (GMP): Particularly relevant for those who have been part of certain occupational schemes, these pensions guarantee a minimum level of income in retirement.
• Enhanced Pension Commencement Lump Sum: Some pensions might offer the option to take a larger tax-free lump sum at the start of retirement, which could be reduced or lost upon transferring the pension.

2. Exit penalties and market timing

Consolidating pensions can sometimes involve exit penalties, especially if the pensions are being transferred from schemes that impose charges for early withdrawal. These penalties can significantly eat into the funds you transfer, reducing the overall value of your retirement savings. Additionally, transferring out of with-profit funds or similar investment types might mean exiting at a time when market conditions are unfavourable, potentially leading to further financial losses.

3. Loss of specific features

Some pensions might offer specific features or benefits that are not available in newer pensions:

• Life cover: Certain pensions include integrated life insurance that might be forfeited upon transferring.
• Contribution flexibility: Some schemes, especially older ones, might offer more flexible contribution options that could be particularly valuable for self-employed individuals with fluctuating incomes.

4. Complexity in comparing pensions

Understanding and comparing the features of different pensions can be complex. Each plan has its own fee structures, investment options, and terms and conditions. Determining whether it is beneficial to consolidate requires a thorough comparison that can be challenging and time-consuming, necessitating expert knowledge to navigate effectively.

5. Potential for disruption and overlooking details

The process of transferring pensions involves considerable administrative work and attention to detail. There is a risk of disruption during the transfer process, and important details or small print might be overlooked. This can result in unexpected outcomes, such as higher fees or less favourable terms in the new pension scheme.

The essential role of professional advice

Given the complexities and high stakes involved, seeking professional financial advice is crucial. Professional advisers can help you navigate the myriad of regulations and financial considerations, ensuring that your decision to consolidate — or not — is based on a comprehensive understanding of the implications. This includes aligning your investment strategy with your risk tolerance, and ensuring that you do not lose out on any valuable benefits unknowingly.

Next steps: Taking charge of your retirement planning

As you approach or manage your retirement planning as a self-employed individual, take the time to consider whether consolidating your old pensions could benefit you. Reviewing your pension situation is not just about possibly merging accounts but about taking control of your financial future. The process of consideration itself can offer valuable insights and help refocus your retirement strategy.

It’s easy to put off such reviews when faced with the immediate demands of running a business, but the long-term benefits of taking action now can be substantial. Start by listing all your pension pots, including those from previous employments. Then, schedule a consultation with a professional adviser who can help you assess your situation and make a well-informed decision.

Chase de Vere is proud to be partnered with IPSE, offering members exclusive access to expert advice regarding their personal finances, including pensions. For those interested in exploring whether pension consolidation is right for you, we invite you to request a complimentary initial consultation. Take this opportunity to make informed decisions that secure your financial future. 

Request your consultation here.

The value of your investments can go down as well as up, so you could get back less than you invested.

This article is for information only and does not constitute advice.