Best practice on managing multiple pensions

Question

Is it financially better to keep pensions from various employers separate or to merge them with the latest one? If you do merge them, are penalty fees accrued from the previous pension provider? This is specifically for a Retirement Solutions Group Personal Pension Plan in the UK.

Answer 1

There are a few benefits to work-based retirement plans, as opposed to personally managed plans you might otherwise enter yourself. Understanding these will likely guide how you choose to consolidate them.

Firstly of course is employer-matching for fund contributions, which make it almost certainly the best solution to always contribute enough to maximize that matching, regardless of nearly any other considerations.

Secondly, depending on jurisdiction, having the plans employer-managed often streamlines the tax deductibility, if applicable [meaning you will often get tax relief directly on each paycheque, vs needing to adjust your instalment payments / wait for end of year tax refund].

Thirdly, employer plans very frequently alleviate fund management fees which would otherwise be owing by you personally. This is for 2 reasons: 1) The plan provider wants to attract the large business associated with dozens/hundreds/thousands of employees, so they offer very competitive management rates which you couldn't negotiate yourself; and 2) The employer likely covers some costs as part of the overall incentive to employees.

These benefits come at one potential drawback: limited flexibility to invest the funds in whatever manner you choose. Typically a work plan will have perhaps a dozen different funds you can allocate money between, often from just a handful of fund providers. Most work plans basically leave you with some diversified equity index funds, some bond funds, and some combined managed funds. For some people this limited choice is a benefit to relieve the stress of complexity, and for some people this limited choice may be seen as a net negative.

So, for most people, leaving your funds within employer managed plans is preferred over removing to a personal plan [on job change, typically]. Consolidating these funds together into a single plan every time you change jobs is often the simplest approach, assuming 3 things: (1) no tax implications; (2) no fee implications; and (3) you don't desire the flexibility of the old plan.

Call the plan provider hotline number to assess whether fees would be paid to send money out or take new money in [some work plans may actually not allow for additional money to be brought in]. Also ask if they are able to confirm the tax treatment of such a transfer [frequently done without tax impact, but this will depend a lot on jurisdiction - and I am not personally familiar with UK taxes in this context]. You will also want to compare the annual fees of each plan [the new one might not be subsidized as much by your new employer and thus might have higher annual fees for the offered funds].

As for losing the flexibility of the old plan, I would only factor this in personally if the new plan is truly limited, and the old plan had something you actually use - like if your old plan had a global equity fund you partially invested in, and your new plan limited to locally-based options.