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If you’re looking ahead to a time when you might access your pension, or are already of an age to do so, it may be in your interests to consolidate your various savings first. This is one of the key findings of a new report published by the UK’s Department for Work and Pensions (DWP)1.

The study, based on interviews with a sample of people aged 50 to 72, considers the behavioural lessons that can already be learnt in the five years since we were all given more control over our pensions. As a result of these freedoms, which were introduced in April 2015, using your pension to buy an annuity paying a guaranteed income over your lifetime is no longer obligatory when you retire. Instead, there’s more flexibility now, meaning we can all access our pensions as and when we choose from as early on as our 55th birthdays – this includes, if you so desire, withdrawing 25% of your retirement savings as a lump sum, tax-free2.

Giving pension savers more choice has brought many benefits. But it also means there is more room for us to make mistakes – such as spending our pension savings too quickly, at a time when we’re living longer.

What the DWP report shows is that bringing your pensions together can help to reduce that risk by giving you greater visibility across your savings. So instead of juggling various pots of money, you can be more precise with your spending and financial planning.

People nowadays can easily find themselves in the possession of several pension pots as they move between jobs and/or open up private pensions over the course of their careers. The UK government estimates that on average we are likely to work our way through 11 jobs in our lifetimes.

Understand your pension

Now, before I carry on it’s important first to distinguish between two different types of work pension scheme: defined benefit (DB) and defined contribution (DC). DB pensions tend to be more inflexible but provide guaranteed incomes, which in some cases are based on a proportion of your final salary. Although these, sadly, are increasingly being phased out by employers, it’s fair to say that transferring out of a ‘final salary’ DB pension is unlikely to be in the best interests of most people. If in doubt, seek financial advice.

In contrast, DC pensions, which include self-invested personal pensions (SIPPs) and most modern occupational pensions, carry more investment risk. The size of the pot and the amount of retirement income you can potentially draw from it, depends on how well your investments perform. And it’s here where bringing them all under one roof can help.

Consolidating your DC pension pots into one would make it easier to see how much income your overall pension holdings can potentially generate. It would also discourage a tendency noted by the DWP report for some retirees to spend the money held in smaller pension pots (ranging from £10,000 to £20,000) – not because they actually needed the money but because these pensions were deemed insignificant compared with their other pots. However, these pots could nonetheless make an important contribution to your retirement planning.

With a clearer view of all your pension holdings, you can do away with such loose mental accounting and be in a better position to calculate the income you’ll likely generate to cover your needs.

Save money too

But that’s not all; consolidating your pensions could also help to make your hard-earned savings work harder for you – so that they can last longer – by focusing on cost.

You can’t control how markets behave but you can control your costs, so it’s worth checking how much you’re paying in fees to your various pension providers. By consolidating your various pensions into one lower-cost SIPP, you could save large amounts over a lifetime of saving.

For example, the annual cost of keeping money in a workplace pension can range from 0.37% a year to as much as 0.94% of the value of the funds held in the account, according to the DWP. By comparison, you can invest in our funds via the Vanguard SIPP from as little as 0.22%3 – roughly half the lower end and less than a quarter of the upper end of that range.

In addition, our platform costs are capped at £375 once you have £250,000 invested with Vanguard – whether in a SIPP, individual savings account (ISA) or general account.

Decluttering your pension savings so you can judge your finances more clearly, and potentially lower your costs, seems prudent given signs that some people may be spending their pensions too quickly4. Aggregate data from the Financial Conduct Authority (FCA) shows 42% of pension withdrawals last tax year running at an unsustainable high rate of 8% or more – eating into these pensioners’ capital at double the traditional rate of pension decumulation.

In addition, more than half of the pension plans accessed for the first time were total withdrawals, the FCA said. Although most of these had less than £10,000 in them, some were much larger, suggesting some retirees might be unwittingly incurring tax liabilities5.


1 The research was undertaken by NatCen Social Research on behalf of the DWP and published on 28 October, 2020. Access the full report: Pension Freedoms: a qualitative research study of individuals’ decumulation journeys.

 2 Under the UK’s pension freedoms, people from the age of 55 can withdraw all their pension savings, use them to buy annuities or guaranteed income products or flexi-access drawdown products, or take out a series of lump sums, or any combination of these. They can also leave their pension pots untouched.

3 Pension Charges Survey 2016 by Andrew Wood, Peggy Young, Christoph Körbitz and Chloė Ramambason, Department for Work & Pensions, 2017.Vanguard charges a 0.15% account fee, with additional charges dependent on the fund chosen and any trading costs within the fund. A tracker fund covering the FTSE 100 or FTSE UK All Share indices would cost 0.07%, so a SIPP saver investing in such a fund would incur total charges of 0.22% plus trading costs.

4 Retirement income market data 2019/20 published on 29 September, 2020.

5 Once your 25% tax-free lump sum entitlement is exhausted, income tax is payable on the rest, subject to your yearly personal tax allowances.


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Important information

This document is designed for use by, and is directed only at persons resident in the UK.

The information contained in this article is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so.  The information in this article does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this article when making any investment decisions.

Issued by Vanguard Asset Management Limited, which is authorised and regulated in the UK by the Financial Conduct Authority.

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