How to consolidate your pensions

What is pension consolidation?

A pension consolidation, or pension transfer, is when you combine multiple pension pots into one. Over the course of your career, you will most likely have worked for many employers and collected a few different pensions as a result. Multiple pensions can cause several problems, so consolidating them could be highly beneficial but there are a few things to watch out for.

What are the benefits of combining your pension pots?

1. Less pension paperwork

Ease of administration is one of the main advantages of combining all your pensions into one pot. Once you’ve consolidated your pension, you will no longer have to deal with statements from multiple providers making it easier to keep track of your wealth.

2. Pension allowances made easy

With only one pension to deal with, record keeping will become straightforward. This will help if you want to make a large one-off contribution using something like carry-forward. When you do this, you have to look back over previous tax years and determine how much of your annual allowance was used. This can be a nightmare if you have more than one pension.[2]

3. Drawing income in retirement is much easier

If you plan to take income from your pension, consolidation is a bit of a no-brainer. A streamlined approach makes taking income simple and it’s easy to change when you need to. Notably, lots of providers impose a minimum value level on the pot before you can commence drawdown. In addition, many pensions that were established before 2015, may not even facilitate flexible income payments.[3] As such, you might have to consolidate into a SIPP (self-invested personal pension) before you retire simply to allow you to access your income the way you want.

4. Easily monitor your pension’s investment performance against your goals

It is more than likely that if you have numerous pension pots, they will be invested in different default funds that have varied levels of risk.[4] If you’re considering how to consolidate your pensions from the different employers, combining these into one pot can ensure that your money is in a single, well diversified strategy that aligns with your goals and needs. Furthermore, understanding how your investments are performing should then be an easy task, as they’ll be reported on in one place and be easily accessible online.

5. Greater choice and investment diversification

It is a common misconception that transferring your pensions to a single provider will reduce the diversity of your investments and impact the safety of your money. In fact, the reverse can often be the case. Many default funds across different providers are invested in similar ways. By consolidating your pensions into a SIPP, your investment choice will typically increase. If your money is managed professionally within the SIPP, the investment management team should be able to access a wider range of sophisticated instruments with the aim of improving risk-adjusted returns.

What are the disadvantages of consolidating your pension pots?

Whilst pension consolidation can make managing your retirement savings easier, there are some potential downsides to consider:

1. Loss of valuable benefits

Pensions established before 2006 may have unique benefits attached such as additional amounts of tax free cash or a guaranteed level of income.[5] It’s important to consider these types of schemes carefully as it may be worth retaining these pensions separately.

2. Potentially higher fees

Whilst some modern pension providers have lower costs, others may charge higher fees. Always compare charges before transferring, as higher costs may reduce your long term returns.

3. Loss of flexibility

Some pensions allow earlier access or have unique withdrawal options. Merging all your pensions into one pot could reduce the flexibility you have in retirement.

4. Not always suitable for those nearing retirement

If you’re close to retiring, consolidating could impact when and how you can access your money. Some schemes offer early access or other benefits that could be lost.

Before making any decisions, it’s worth reviewing your options carefully and seeking professional advice to ensure consolidation aligns with your retirement goals.

Things to consider before consolidating your pensions

Is it worth combining your pensions? There are a number of things to consider. One of the most important is the potential for exit penalties. Many pensions can be transferred without a penalty being applied. Some though, can have reasonably high exit charges. Although, these typically reduce as you reach retirement age. As with everything fee-related, it’s about weighing up the benefits you receive alongside any additional charges you incur to determine whether it is worthwhile.[6]

Another consideration is the service and support offered by your new provider. Managing a pension is a long term commitment, so having access to good customer service, user-friendly online tools, and clear communication can make a big difference.

If you have small pension pots worth under £10,000, it may be worth keeping them separate rather than consolidating. That’s because you can cash in up to three small pension pots without triggering the Money Purchase Annual Allowance (MPAA).[7] The MPAA significantly reduces how much you can contribute to a pension in the future, dropping the annual allowance from £60,000 to £10,000 once it’s triggered. Keeping small pots separate gives you flexibility to withdraw them later whilst still allowing you to make full pension contributions if needed.

You should also avoid transferring a pension your current employer is contributing to whilst you’re still working for them. Moving this type of pension could mean losing the employer contributions. If your workplace pension isn’t the best, you may have the option to regularly transfer money into a different pension if you prefer. However, this isn’t always straightforward and may come with tax implications or fees. It’s worth seeking expert advice before making any changes.

Whilst consolidating pension pots can simplify your retirement savings, it’s important to do your homework first to avoid unexpected drawbacks. Taking the time to assess these factors can help you make a decision that benefits you both now and in the future.

Can you consolidate all of your pensions?

In most cases, you can combine multiple pensions, but there are exceptions. Some pensions, particularly older workplace schemes or defined benefit pensions, may have restrictions or valuable benefits that could be lost if transferred. Before making any transfers, check whether your pensions are eligible to be moved and whether doing so is in your best financial interest. If you’re unsure, seeking professional advice can help you make an informed decision.

Why the type of pension matters

Defined Contribution (DC) schemes are based on ‘contributions’ you have made to the scheme. These build up over time to provide an invested pot that can be accessed flexibly.[8] Conversely, Defined Benefit (DB) schemes provide a guaranteed, regular income. Defined Contribution schemes are more typical, modern pensions and are usually easily consolidated. Whilst it is possible to transfer a defined benefit scheme, it’s extremely high risk and is only advised in unique circumstances. You must take advice on a Defined Benefit transfer.[9]

Should you use professional pension consolidation services?

Using a professional pension consolidation service can save time and help you avoid costly mistakes, but it’s not always necessary. If you have multiple defined contribution (DC) pensions with no exit fees or special benefits, you may be able to combine them yourself by transferring to a provider of your choice.

However, if you have defined benefit (DB) pensions, pensions with valuable guarantees, or are unsure about the best options, seeking professional advice is highly recommended. A qualified financial adviser can assess if it is better to consolidate your pensions, highlight any risks, and handle the transfer process for you, ensuring you don’t lose valuable benefits.

How to consolidate your pensions in five steps

Working with a qualified financial adviser can make pension consolidation much easier, as they will handle most of the heavy lifting for you. Here’s what an adviser will typically do to consolidate your pension pots:

1. Gather information on your existing pensions

Your adviser will ask you for details of any pensions you know about, including policy numbers and recent statements. If you’re unsure about old pensions, they can help track them down using employer records or the government’s Pension Tracing Service.

2. Request letters of authority

Before they can access full details of your pensions, they will need your permission. You’ll sign a Letter of Authority, allowing them to contact pension providers on your behalf and obtain information about fees, benefits, and transfer options.

3. Analyse your pension schemes

Once they have the necessary details, your adviser will review your existing pensions to assess:

• Any valuable benefits (for example, guaranteed annuity rates or enhanced tax free cash) that you could lose by transferring.
• Exit fees or penalties that could make consolidation less cost effective.
• The investment options and fees of your current pensions compared to potential new providers.

4. Provide a recommendation on whether you should consolidate your pensions

Based on their analysis, your adviser will recommend whether consolidating your pension pots is the best option for you. If it is, they will suggest a suitable new pension provider that aligns with your financial goals, minimises costs, and offers the right investment options.

5. Set up and monitor your new pension

Once your pension transfer is complete, your adviser will help you structure your new pension, ensuring your investment strategy matches your risk tolerance and retirement goals. They may advise on contribution levels and tax efficiency. They can also provide ongoing support, helping to adjust your investments, maximise tax benefits and plan your withdrawals effectively.

As you’re probably gathering, the benefits of pension consolidation tend to outweigh the drawbacks. It is really about approaching consolidation in a sophisticated and thoughtful way whilst taking advice to ensure you don’t make any major mistakes.