If you’ve moved jobs, shouldn’t your pension move too?
About one in 10 of us change jobs each year1, but we don’t always switch our pensions over. Instead, many people run the risk of losing track of old pensions or of paying thousands of pounds extra in fees over the ensuing years.
It’s not just about the money. Managing multiple pension pots can be a hassle, requiring a lot of time and effort. The more individual pensions you have, the harder it can be to manage them properly.
Here, we run through four key reasons why you might want to transfer your pensions into one easy-to-manage place.
1. Save on costs
Let’s start with the pounds and pence. Most pensions charge an annual percentage fee for managing the pension plus a separate charge for managing the investments themselves.
These costs can add up over time, especially if you’re saving for a long-term goal like retirement.
Even a small saving in costs can have a big impact, as you can see in our chart below. It shows the impact of saving just 0.3% annually in fees over 25 years on three different-sized pension pots, assuming an investment return of 5.5% a year. To keep it simple, we’ve also assumed no further money is paid into them.
Source: Vanguard calculations, June 2023
If you started with a pension worth £50,000, for example, paying 0.3% less in fees each year would save you more than £13,000 over 25 years. If you had a pension pot worth £150,000, paying 0.3% less in fees could save you almost £40,000.
Overall, people who save just 0.3% in costs end up with a pension that’s 7% bigger. That can be worth as much as an extra two years in retirement for you, helping to give you peace of mind that your pot won’t run out, or potentially allowing you to retire early2.
Your pension investments will likely benefit from compound growth over time, where you earn returns both on your original investment and on the subsequent returns. By allowing your pension investments to compound in one pot, you can often benefit from lower fees as you build up more money. At Vanguard, for example, we cap our annual account fee at £375. The more you invest with us, the more you can potentially save.
2. Keep track of investments
As well as keeping an eye on costs, you need to make sure you’re invested wisely. What you invest in matters in terms of how much risk you want to take and your potential returns.
Shares – where you own part of the company – have historically offered higher long-term returns than bonds, but they have also carried more short-term risk3. Bonds are a type of loan to governments or companies.
A portfolio orientated more towards bonds would be likely to fluctuate less than one investing solely in shares, but it would also be likely to generate lower returns over time. Remember that past performance is no guide to future returns; you may get back less than you put in.
Managing the mix of your investments – or ‘asset allocation’ – over different pensions can be challenging. This is particularly important because your asset allocation is likely to be the biggest factor in determining your long-term investment returns4.
Not all pension providers will offer the same range or mix of investments, which might make it difficult to invest with a consistent strategy across your various pensions.
You may also find you’re having to track information from several different providers, just to make sure your investments are behaving as expected. This can be one benefit of having everything in one place.
3. Manage more easily
One of the biggest difficulties with managing multiple pensions is simply making sure your details are up to date.
You might have different passwords, for example, or have to contact multiple companies to update your address when you move. If you forget to do so, it could be difficult to regain access to your account if your contact details are out of date.
It’s typically easier to consolidate your pensions as you go along, allowing you to keep track of everything in one place.
Remember, though, that it may not always be in your interests to transfer out of a pension, particularly if you have a ‘final salary’ or ‘defined benefit’ (DB) pension – or any other guarantees5. If in doubt, it is always worth seeking financial advice.
4. Take advantage of retirement options
The introduction of pension freedom rules generally means that people these days have more flexibility with their retirement options.
But not all pension schemes allow you to take advantage of these new rules. So, there is no guarantee that you won’t have to transfer your pension before retirement anyway.
Some pension schemes will require you to transfer to another type of account before you can access your pension, for example. The extra work this involves might have been better spent consolidating your pensions in the first place.
Even if all your pension schemes are simple, the process of managing an income from multiple pensions can be time-consuming. Just when you want to enjoy your free time, you might find it chewed up by having to work out how much you have coming from each scheme.
A transfer in time saves nine
The process of transferring a pension doesn’t have to be complicated. And it can certainly save you a lot of time and hassle later on.
If you think you might have an old pension you’ve forgotten about, you can even use the government’s Pension Tracing service.
1 Office for National Statistics, April 2019. For the full report, see here. Please note that this data is from 2019 and that the percentage of people changing jobs may have changed in the wake of the report.
2 While retirement can last longer than 30 years, this timeframe is generally seen as the benchmark for how long a pension should last without a high probability of running out. How much you take out is known as the sustainable withdrawal rate. While estimates of sustainable withdrawal rates vary, our research (Khang, Pukula and Clarke, Sustainable Withdrawal Rates by Return Environment) has suggested it is likely in the region of 2.8% -3.3% for 2022 retirees over the 30 years ending in 2052. From this, we can extrapolate that a pension that is 7% bigger can therefore be said to last around two years longer. Source: Sustainable Withdrawal Rates by Return Environment: A Time-Varying Bayesian Analysis, Vanguard Research 2022, published in Journal of Retirement. Calculations based on data from the Survey of Professional Forecasters, Morningstar, Inc. (intermediate-term U.S. government bond returns), Kenneth French’s Data Library (U.S. total stock market return), and Robert Shiller’s website (CPI).
3 Sources: Bloomberg. Data period from 29 December 2000 to 31 December 2022. Indices used: Bonds: Bloomberg Global Aggregate Total Return, hedged in pounds sterling. Equities: FTSE All-World Total Return, in pounds sterling.
4 This finding was initially revealed in a study by Brinson, Hood and Beebower, published in 1986. It found that roughly 80% of the variance of returns comes from strategic asset allocation. Since then, a great many studies, looking at different periods and types of funds, have come to similar conclusions, including a Vanguard study based on monthly returns for 743 UK balanced funds from January 1990 through September 2015: The global case for strategic asset allocation and an examination of home bias (Scott et al., 2016).
5 These pay a guaranteed income depending on your final or average salary and are funded by employers. In general, DB pensions are usually not suitable for consolidation and are becoming increasingly rare in the private sector.
Investment risk information
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
Eligibility to invest in a Vanguard Personal Pension depends on your individual circumstances. Please be aware that pension and tax rules may change in the future and the value of investments can do down as well as up, so you might get back less than you invested. You cannot usually access your pension savings or make any withdrawals until the age of 55.
Your pensions transfer will be sent to us as cash. During this period you will be out of the market (not invested) so you could miss out on any increase in the value of your pension fund should the market rise.
This article is designed for use by, and is directed only at, persons resident in the UK.
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