If you’re a contractor working through an umbrella company, like SmartWork, chances are you’ve worked for several different companies over the years. That means you’ve probably ended up with multiple pension pots scattered across various providers. Sound familiar?
What many umbrella company workers don’t realise is that the various workplace pensions they’ve accumulated might actually be costing them money and making retirement planning unnecessarily complicated.
Why Umbrella Workers End Up With Multiple Pension Pots
The days of staying with one employer for your entire career are long gone, especially for contractors and IR35 workers. The average worker now has around 11 jobs during their lifetime, but for freelance contractors, this number is often much higher.
With auto-enrolment signing up eligible employees as soon as they start a new role, it’s incredibly easy for contract workers to end up with what you might call a “smorgasbord” of pensions – some more substantial from more extended contracts, others smaller from roles you might have only been in for a short period.
The problem is, many of these pension pots can be easy to lose sight of, especially if they were from brief contracts or temporary positions. A recent survey found that 49% of people feel overwhelmed by the amount of pension information they receive, with 41% saying they have no idea what to do with it all.
Why Multiple Pensions Are a Problem
Having numerous different pensions isn’t just an administrative headache for umbrella workers; it can actually cost you money. Here’s why:
The confusion factor: Without the long-awaited pensions dashboard (which is still some way off), it’s genuinely hard for contract workers to know where they stand financially. You might not know how much you’ve saved for retirement, where your money is invested, or which pension company is managing which scheme.
Higher costs for contract workers: Just like many other things in life, economies of scale apply to pensions, too. The charges for running one larger pot are typically much lower than paying multiple fees for managing lots of smaller ones.
Expensive older workplace pensions: Fees for running older-style pensions can be particularly high, especially those from the early years of your contracting career. You could be paying as much as 0.75% or more on an old-style pension, while with a modern SIPP (Self-Invested Personal Pension), you should be able to pay less than 0.5%.
Inactivity fees on dormant pensions: You might also face additional charges for old workplace schemes that you’re no longer paying into. These are called dormant pensions, and some providers charge extra fees just for keeping them running.
Limited investment choices: Many older pensions limit you to a much smaller selection of funds, whereas modern SIPPs offer a much wider choice, including funds, investment trusts, ETFs, and UK and overseas shares.
Over the years, these fees slowly chip away at the value of your pension pots, significantly reducing your investment returns.
How Consolidation Can Boost Your Pension
Here’s where it gets interesting. By transferring one or more of your old workplace pensions into a modern online SIPP, you could reduce these charges significantly.
Online SIPPs typically charge somewhere between 0.2% to 0.5% of your pot value, which is already much better than those older, more expensive pensions. But some providers take a different approach entirely – they charge a flat fee instead of a percentage. This is often the best pension option for contractors with larger pots.
This flat-fee approach means you pay the same amount regardless of how big your pension pot gets, which makes much more sense as your savings grow over time.
The numbers speak for themselves: someone with a £150,000 pension charging 0.75% in fees, with ongoing contributions of £200 a month, could save around £20,000 in fees over 20 years simply by transferring to a flat-fee SIPP.
But here’s the exciting part, because of something called compounding, those fee savings grow into something much bigger. The extra money that stays in your pot (instead of going to fees) generates additional investment returns each year. This means you could potentially boost your pension by around £60,000 after 20 years.
Even with smaller pension pots, the savings can still be significant and help prevent unnecessary charges from eating away at your retirement funds.
Things to Consider Before You Transfer
While consolidating your pensions can look like an obvious choice, there are some important things to check first:
- Make sure your new pension is cheaper overall.
- Check for any exit fees from your old pension (note that exit fees aren’t permitted on pensions set up from 1 April 2017 onwards, but they’re often charged on older plans and are currently capped at 1% of your pot’s value)
- Look out for any valuable benefits you might lose, such as guaranteed annuity rates, survivor benefits, more than 25% tax-free cash, or a protected low retirement age.
- See if you’re invested in any with-profits funds that pay bonuses you’d lose by leaving.
- Consider whether you have any small pots worth less than £10,000 that might offer additional flexibility.
That last point about small pots is particularly interesting for contractors. There’s a little-known rule that lets you cash in pots worth less than £10,000 without triggering something called the “money purchase annual allowance.” This means you can access a lump sum after age 55 while still being able to contribute the full amount (100% of earnings up to £60,000) to your other pensions, rather than being limited to just £10,000 per year. You’ll still pay tax on withdrawals – the first 25% is tax-free and the remainder is taxed at your normal rate.
Benefits like guaranteed annuity rates are more commonly found in older pensions from the 1980s and 1990s, but it’s always worth checking what you might be giving up before you switch.
What Types of Pensions Can Be Consolidated?
Most defined-contribution pensions (the type where you build up a pot of money) can be transferred into a SIPP quite straightforwardly.
However, defined benefit pensions – like final salary or career-average schemes – are a different story entirely. These workplace pensions pay you a guaranteed income in retirement based on your salary and years of service.
While you could transfer out of some private sector or funded public sector defined benefit schemes, you’d be giving up that guaranteed income. If your transfer value is over £30,000, you’re legally required to get financial advice first. For the vast majority of people, staying in a defined benefit scheme is the better option.
It’s also worth noting that unfunded public sector pensions, such as the NHS Pension or Teachers’ Pension, can’t be transferred out at all.
How SmartWork’s Partnership Benefits Contractors
As part of our commitment to supporting our umbrella workers’ financial well-being, we have partnered with Interactive Investor to offer pension and investment options to our workers. This partnership means you have access to professional guidance and competitive rates when it comes to consolidating your contractor pensions.
Suppose you’re considering consolidating your pension pots. In that case, this partnership gives you access to Interactive Investor’s flat-fee SIPP platform, which could save you thousands of pounds in fees over the years. This is particularly valuable for contractors who may have accumulated multiple small pension pots throughout their career.
We have set up an easy and quick online process for our workers to open a SIPP. All they need to do is email their business manager, and they will provide the link to our online form.
How to Transfer Old Workplace Pensions: A Step-by-Step Guide
If you decide consolidation makes sense for your situation as a contractor, the process is relatively straightforward:
- Review your existing contractor pensions – Make sure you understand what you currently have and any benefits you might lose.
- Open a SIPP account (or use an existing one if you already have one) – consider Interactive Investor if you don’t have one yet.
- Request the pension transfer – Your SIPP provider should manage most of the process for you.
- Sign the paperwork – You’ll need to give your old pension providers permission to release your pots.
- Choose your investments – This doesn’t have to be daunting; you can start with just one fund, and most platforms offer guidance and recommended options.
The whole transfer process typically takes between four and 12 weeks, depending on how quickly the various companies work. Your provider should do all the legwork and keep you updated throughout the process.
Pension Tax Relief and Consolidation
It’s worth noting that consolidating your pensions doesn’t affect your pension tax relief. Whether you’re working inside or outside IR35, you’ll still receive the same tax relief on your contributions – 20% for basic rate taxpayers, 40% for higher rate, and 45% for additional rate taxpayers.
Final Thoughts
Consolidating your pensions isn’t right for everyone, and it’s always a good idea to seek independent financial advice if you’re unsure. However, for many contractors and umbrella company workers who’ve accumulated multiple small pension pots over the years, consolidating them into one place could save money and simplify retirement planning.
If you’re concerned you have lost track of some old workplace pensions, you can use the Government’s pension tracing service to track them down.
Remember, as you’re already taking charge of your career by choosing flexibility and variety in our work. Taking the same proactive approach to your contractor pensions could pay dividends in the long run.
This article is for information purposes only and shouldn’t be considered as financial advice. Pension and tax rules depend on your circumstances and may change in future. If you’re unsure about your pension options, consider seeking advice from a qualified financial adviser.
To learn more about the pension and investment benefits available through SmartWork’s partnership with Interactive Investor, please get in touch with our team.
