This week we again tear into a question from a listener to the Informed Decisions Podcast, and it is one that stated ‘Should I consolidate old pensions, or not?’. It’s a super question and one I have been asked many times over the years – so in my commitment to answer more listener questions, I finally get around to sharing thoughts and insights here for you. This week we’ll look at aspects if you consolidate old pensions:

• The pros of doing it
• The downsides of doing it
• Why it might not matter either way

Pensions & Coffee Beans

It might be a stretch, but I’m gonna say that pensions are much like a bag of coffee beans. If you open them, you gotta start consuming them regularly whether you want to or not. Alternatively, you can leave them sealed and unused for a fairly long period of time! This is certainly the case with a bag of coffee beans, you can leave it unopened on the shelf for a long period of time, but once you pop it it really ought to be used. This is also true to say of each pension pot you possess, once you reach the age of 60 – if you open it, you gotta start consuming it regularly, whether you want to or not!

Interestingly, coffee beans are/is a funny business isn’t it? Lots of roasters in all sorts of sheds and warehouses across the country, roasting beans from the same relatively small handful of countries, all pachaging their produce differently and all charging different prices. Over the past few years we’ve bought beans from quite a few of them! We’ve sampled beans from Kenya via Kerry, Peru via Portlaoise, Mozambique via Meath, and Costa Rica via Cork! For the uneducated like myself, it’s fun to try different ones, but I’m happy to admit that I don’t know my Arabica from my Robusta! And while we’re at it, it’s probable that coffee beans are much like pensions in the aspect that if you looked into it, there some genuine operators offering real value to the farmers, suppliers and us consumers, and some that are trying to skin everyone and sell us scraps off the roasting floor in a nice looking bag?!

Anyway, get back on track Paddy……!

So, the listener suggested that they have a few different pension pots from old employments that they are no longer working in. Most likely these are now still sitting in the old occupational scheme, or they are in Personal Retirement Bonds (PRBs, also know as Buy Out Bonds, BOBs). See Blog 158 for the A to Z of financial acronyms if you like more info on these vehicles!

There are usually two reasons why you might have multiple old pensions schemes

1. have have separate pensions from old employments or self-employments
2. Your ‘advisor’ told you to set up a new pension every year when you were making contributions every year. This really bad act was often done by these ‘advisors’ as they could get bigger up-front commissions if you started a new pension with a lump sum, as opposed to you just topping-up the original scheme you had. Usually, but not always, this was purely for their own gain and nothing to do with helping you achieve a better outcome.

Either way, you may now be wondering if you should consolidate old pensions into one scheme to try simplify, reduce fees, improve performance, retain flexibility and be a smart cookie? Here goes…..

A Word About AVCs: Consolidate Old Pensions

Many of us who were in previous employments may have been contributing AVC’s, so when we see our statements from the old scheme, we see the main scheme value, and we also see an AVC value. The main scheme (usually Defined Contribution Schemes) can often be moved to another scheme with very little hassle (and there’ll be ‘advisors’ queuing up to tell you why you should do it immediately! The AVC aspect of your old pensions can be less easy to move; depending on whether they are PRSA AVCs or pure AVCs, and whether the old scheme is winding up or not, will determine if you have the option to move them to a Personal Retirement Savings Account (PRSA), PRB or new DC scheme, and whether the new scheme is still linked to the original employment. If it is still linked to the old employment, your accessing the new scheme will be governed by the rules of the original scheme! For example, if you move an old DC pension scheme, along with the AVCs you did at the time, the entire value can move, and the link with that old employment is fully broken (a positive!). It probably sounds more convoluted than it is in practice, but worth checking this aspect out separately if considering moving AVCs.

Pros: Consolidate Old Pensions

1. Tidiness: Instead of having to retain passwords, documents and tracking multiple schemes, you would have a single account to monitor or keep records for.
2. Death: If you pass away, your executor and beneficiaries will have a single provider/trustee to engage and submit docs to claim death benefits from. Assuming the scheme/PRB relates to an employment that you are no longer an employee of, or it’s a PRSA, the full value to be paid out to your survivors. See Blog 144 for more cheery updates on what happens your pension pots when you die! Also worth viewing Pensions Authority website details.
3. Time: Lets face it, time is our most precious resource, having a single scheme instead of multiple may save you time, not to mention brain energy and attention!
4. Clarity: When you look at a single scheme you instantly see how near or far you are from your desired end-point (assuming you have an end-point in mind or documented). You also have immediate clarity on how your single fund has grown/shrunk since you saw it last
5. Strategy: If you already have multiple income sources aside from these schemes, it can form part of the overall ‘income in retirement’ strategy and to simplify the planning and decisions to be made
6. Performance & Fees: Despite what many believe/hope, the fact that you will have a bigger pot if you consolidate old pensions will most likely NOT result in you getting access to lower fees. Most typically, the fees on a pot of €20k will be the same percentages as those on €100k pot etc. Where you may (potentially) stand to benefit is if you move from sub-optimal schemes to a scheme that offers lower fees and potential for better returns. But important to recognise that this may be achieved simply as a result of moving, as opposed to the fact that you were consolidating old pensions.

Despite what many believe or hope, consolidating old pensions will most likely NOT result in you getting access to lower fees.

Sir Paddy Delaney 🙂

Cons: Consolidate Old Pensions

Flexibility: If you consolidate multiple schemes you could be reducing the flexibility you have over the sequence in which you draw your pots down. To explain; if you have multiple schemes relating to different employments, you will have flexibility over when you take each of them. You can take them separately at different times between say 60 and 70. In certain circumstances this can be advantageous, particularly if you will need a portion of the total schemes value at 60 for example, but won’t need the other portion until 70 for example. Much like the coffee beans, you can leave one of the pensions unopened until later, therefore not having to take a taxable income from it.

Diversification: If you consolidate old pensions into one scheme, you could potentially reduce the diversification of your overall pension assets. Say for example, you were currently invested in 2 schemes; one was invested in European Equity and one was invested in US Equity (it’s an example, not a recommendation!). If you consolidated them into one, and because USA has had such a great 6 months you move all assets into US Equity, you’d be getting very narrow in your allocation and reducing the diversification you previously had.

When It Might Not Matter Either Way, If You Consolidate Old Pensions Or Not

• If you have little or no likelihood of needing to draw the pots until you are obliged to by Revenue (currently 70 with a PRB/BOB or 75 with PRSA) – it negates any potential flexibility benefits of having separate schemes
• If you are appropriately invested in your multiple schemes, are comfortable that you have a handle on the various details, are paying fair fees, then there might be little difference in consolidating them or not

Summary: Consolidate Old Pensions, Or Not

The reality is that there may be very little to be gained from the act of consolidating them – it may end up better for you to retain them as separate schemes which you can draw-down at separate points between 50 and 75. Or, it might make total sense to consolidate them, if you can achieve a reduction in hassle, opacity, fees and an increase in visibility, performance and clarity. It all depends on where you are, and where you wanna get to! A recent quote I came across that brings us back around to coffee, which reminded me of the Stoic ‘Amor Fati’:

I wake up some mornings and sit and have my coffee and look out at my beautiful garden, and I go, ’Remember how good this is. Because you can lose it.

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Thanks for reading,

Paddy.