A time for pension consolidation

To get a grip on your pension finances, it helps to have it all in one place, says David Prosser.


Consolidating can be time-consuming, but it's worth it
(Image credit: AIMSTOCK)

To get a grip on your pension finances, it helps to have it all in one place.

For many people, getting to grips with their finances is a key new year's resolution and pension planning is often a big part of that. In particular, now is a good time to take a look at consolidating pension savings you may have in several different places into a single plan.

There are lots of advantages to doing this. The average worker now builds up 11 pension pots with different employers and pension providers during their working life, according to government data. So it's easy to lose track of your cash over time. In fact, research last year from insurer Aegon suggested one in five people have lost track of at least some of their pension savings. Having all your money in one place should reduce the risk of overlooking any.

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Keeping it all in one place

Consolidation should also make it easier to manage your savings. You can see exactly what your total pension savings are worth, monitor the performance of your investments (and keep an eye on any charges which may well be excessive, particularly on older pension plans), and assess whether you're on track to hit your retirement goals.

So how do you go about doing it? One option is to work out which is the best of your current pensions, then move all your money into that plan. Pay close attention to the fees, of course, but also make sure you understand the investment options and facilities the pension offers for the future. For example, if you plan on using income drawdown in retirement, what would this involve? And does the scheme give access to the sorts of investment you want to use?

Alternatively, you could start an entirely new pension plan elsewhere and transfer everything into this scheme. This allows you to select the perfect pension for your needs.

But before you go ahead, consider potential downsides of transferring. If you're currently paying into an employer's scheme, you will be receiving contributions from them, topping up your savings; exiting such a plan is likely to be a bad idea, as you'll miss out on future top-ups. Similarly, if you have pension benefits in a final salary or defined benefit scheme, it is almost never a good idea to transfer out, because these plans offer guaranteed levels of retirement income that will be tough to match elsewhere.

Also check whether you have to pay exit charges, or whether there are any loyalty bonuses you'll miss out on by going elsewhere. If so, you may need to estimate your chances of recouping these costs in the years following a transfer.

Don't miss out on pension tax relief

Around ten million people must complete a 2017-2018 self-assessment tax return by the end of next month (see page 18). If you're one of them, ensure you get all the tax relief you're owed on your pension contributions.

Everyone automatically receives basic-rate income tax relief, worth 20%, on such contributions. But higher- and additional-rate taxpayers are entitled to an extra 20% and 25% respectively. If you're a member of a work-based scheme, your employer will usually claim this on your behalf, but if you're in an individual arrangement such as a personal pension, you'll have to claim via your tax return. This may also be the case if your work scheme is set up as a group personal pension if in doubt, check.

The annual allowance on pension contributions for most people is the lower of their taxable salary or £40,000. But if you're in danger of exceeding this and so facing tax charges you may be able to use the carry-forward rules. These allow you to bring forward unused pension allowance from each of the past three years to top up this year's.

Tax tip of the week

France will introduce its own tax on big technology firms from 1 January, after EU-wide efforts stalled, says BBC News. The French finance minister expects the tax to bring in €500m over the course of next year. France and Germany had been pushing the European Commission to agree to measures by the end of 2018, but the digital tax is opposed by countries such as the Czech Republic, Sweden and Ireland. The EC has published proposals for a 3% tax on the revenues of internet groups with global revenues of more than €750m and taxable EU revenue above €50m, but critics fear an EU tax could breach international rules on equal treatment for companies across the world. UK chancellor Philip Hammond plans to introduce a digital-services tax in the UK from April 2020, but this needs to go through a consultation first.

Should we bin the £10 pension bonus?

Is it time to dump the Christmas bonus for pensioners? For almost 50 years the government has topped up the state pensions of most pensioners with an extra payment; this year's bonus was paid to around 13 million pensioners at the start of the month.

There's just one catch: the cash on offer has not been increased since it was first introduced the bonus is worth only £10, and many pensioners don't even notice the extra money landing in their accounts.As a snap poll of Daily Mail readers found last week, many pensioners now believe the government would be better off spending the money more wisely. The total cost, at around £130m, could be targeted at the most vulnerable pensioners, or redirected to a totally different priority. The £10 per person, by contrast, buys very little.

Had the bonus been increased in line with price inflation since 1972, when it was introduced by then-prime minister Edward Heath (pictured), it would be worth around £134 today a far more meaningful sum. When it was first distributed, the money was enough to pay for a Christmas turkey, with cash left over to pay for presents and other festive shopping. Indeed, the bonus was worth more than the weekly state pension of £6.75 payable at the time. Today, by contrast, it's a relatively meagre offering in the context of a state pension worth just over £164 a week.However, the Department for Work and Pensions says it remains committed to the bonus understandable given the "Christmas cancelled" headlines it would probably provoke.

David Prosser
Business Columnist

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.