Automatic enrolment into workplace pensions and the prospect of the pensions dashboard are just two reasons savers may want to 'tidy things up' by consolidating their smaller pensions into one larger pot. But ex-pensions minister and Royal London policy director Steve Webb has warned savers of five reasons to think carefully and seek financial advice or guidance before consolidating to avoid inadvertently making themselves worse off.
1. Some pensions allow members to draw more than 25% of the pot tax free or to access the pension before age 55. If these pensions are transferred out individually, those privileges can be lost.
2. When some pensions were sold, they carried a guaranteed annuity rate (GAR) which meant they could be used to buy an annuity at a rate which could be better than the open market. Given the collapse in annuity rates in recent years, these guarantees are extremely valuable but can be lost if people transfer out into another pension.
3. It's easy to be hit by multiple exit penalties when combining pension pots. While modern pension policies can generally be merged without penalty, savers can face exit charges such as a Market Value Adjuster (MVA) that can be applied to older With Profit policies if they want to access their monies.
4. Accessing a pension counts against your lifetime allowance (LTA), but savers are allowed to take up to three small pots of under £10,000 without counting against the LTA. Those who retain small pots effectively add £30,000 to their LTA.
5. Taking taxable cash from a defined contribution (DC) pension triggers the money purchase annual allowance (MPAA), but taking from a pot under £10,000 does not do so. Those who consolidate all their small pots will miss out on this tax-free benefit and could slash their future ability to save into a pension by 90%.
“While combining all of your pension pots may seem the tidiest thing to do and can have some advantages, there are also a number of unexpected disadvantages,” Webb said. “Older pension policies have attractive features which would be lost if transferred, whilst small pots benefit from certain tax privileges which do not apply to larger pots.”
As ever, at Brunsdon Financial we would suggest the best approach is to seek impartial and qualified financial advice from us in the first instance.
Please note this information does not offer specific personal advice. The information is based on our understanding of current taxation, legislation and HM Revenue & Customs practice as at November 2019, all of which may be subject to change. The FCA does not regulate tax advice.
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