Five reasons to consolidate your pensions and three to think twice

It doesn’t matter whether you’re collecting pensions as your climb the career ladder, or you’re trying to get your act together in the run-up to retirement, there could be a strong argument for consolidating pots.

Combining pots that you’re no longer contributing to can help you take control of your retirement saving and, potentially, give the value of your pot a substantial boost.

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Here we explore five reasons why it might make sense to consolidate your pensions and three where you might want to hold off.

1) You’re struggling to keep track of multiple pensions

If you’ve changed jobs regularly and started paying into a new pension with each move, you’ll likely be building a veritable collection of retirement savings plans. By combining all the pots you’re no longer contributing to, it will be easier to keep track of your retirement saving and monitor their performance.

To keep things simple, it can help to set up a standalone personal pension, such as a self-invested personal pension (SIPP), that you can transfer old pensions into, with each job change. However, it’s important not to close your current workplace pension as you would miss out on employer contributions (unless you can convince your employer to pay into your new pot instead).

2) You don’t know where your savings are

There’s more than £31 billion languishing in 3.3 million lost pensions, according to the Pensions Policy Institute, worth an average £9,470 each.

It’s surprisingly easy for pensions to get “lost”. If you don’t update every pension provider with your new address each time you move house, you can quickly lose track of pots from jobs you left years ago.

If you think you’ve got a pot or more that’s gone AWOL and you’re struggling to track it down yourself, you can try the government’s free pension tracing service.

Once you and your lost pot(s) have been reunited, it might be worth transferring it into an active pension, to ensure it doesn’t go missing again.

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3) You can cut the cost of your pension

The impact of charges on the eventual value of your pension cannot be underestimated.

By cutting your costs, you’ll get to keep more of your investment gains and, over the years, this can add thousands to your pot. It could help you retire early or give your retirement income a substantial boost.

But, according to ii research, 83% have no idea of how much they are paying in pension account charges – either in pound or percentage terms. If you don’t know what a pension is costing you, it’s important to find out, either by checking your account online, digging out your annual statement or calling your provider. Pension charges have dropped substantially in recent years and you can often reduce your costs by switching out of an older-style workplace or personal pension into a modern low-cost SIPP.

Most pensions charge a percentage-based fee, which means the more your pot grows, the more you end up paying in charges. By switching to a SIPP that charges a flat fee, you’ll pay the same amount every month, however big it gets.

4) You’ll get more options in retirement

Since 2015, it’s been possible to access your pension savings in any way that you wish. You can make lump sum withdrawals, buy an annuity or go into drawdown (which allows you to keep your pot invested and manage your own pension income). But just because this flexibility is permitted by pension legislation, it doesn’t necessarily follow that all providers will offer every withdrawal option.

For example, Nest (the workplace pension set up the government) doesn’t offer flexi-access drawdown. Older personal pensions may also not be set up to deliver flexible access to your retirement savings, and you may be limited to cash withdrawals or using funds to buy an annuity.

In these cases, you would need to transfer your pension to a more modern provider to access the full range of retirement income options.

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5) You want more control

An estimated 90-95% of people who are in a defined contribution (DC) workplace pension, will invest in the scheme’s default fund. Even though schemes will typically offer access to alternative options for those who want them (for example Sharia, ethical or higher-risk funds), you could get access to a much wider choice of investments with a pension that you arrange yourself.

A SIPP, for example, will offer access to thousands of investment funds, investment trusts, exchange-traded funds (ETFs), as well as UK and overseas shares, enabling you to take a more active role in managing your retirement savings. This might appeal if you want more control and you have already had some experience investing elsewhere (with a stocks and shares ISA, perhaps).

But before you switch…

While there are plenty of reasons to transfer pensions into one easier-to-manage pot, there are also occasions where it pays to think twice (or even take advice) before you proceed.

1) If you’ve got any guarantees on your pensions

The big one to watch here is defined benefit pensions as they pay an income that is guaranteed for life. If you transfer out of a DB scheme you might be able to manage your income more flexibly, but you’ll lose that valuable guarantee. The onus will be on you to ensure your income is sustainable.

For this reason, if you have a DB pension with a transfer value over £30,000, you will need to get independent advice before you can proceed.

But DB pensions aren’t the only schemes with guarantees. If you joined a pension in the 1980s or 1990s, there’s a chance it might offer “guaranteed annuity rates”. As the name suggests, this ensures you get a specific rate on an annuity that is likely to be significantly higher than rates available on the open market today.

2) If you’ll have to pay an exit fee

Some pension schemes will, unfortunately, whack you with a fee when you move your money elsewhere.

Although a ban on exit fees was introduced on 31 March 2017, if you joined your pension before that date, you could still be affected.

How much you will need to pay will vary according to the scheme, the size of your pot and your age.

If you’re 55 or over (rising to 57 in 2028), the maximum fee you’ll pay is capped at 1%. However, if you’re younger than that, you could face a much higher fee.

As such, if you want to switch you’ll need to weigh up the potential benefits of consolidation against the cost of the fee.

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3) If you’ve got one or more small pots

One of the reasons so many people consolidate their pensions is that it allows them to “tidy up” any small pensions they might have, often from jobs they weren’t in for long.

However, if you’ve got any pots worth £10,000 or less, there might be reason to leave one or more where they are. That’s because, once you’re 55 (57 from 2028), you can take advantage of so-called small pot rules.

Normally, once you’ve made a taxable withdrawal from a pension, the amount you can then pay into your pot going forward will reduce from 100% of your income up to £60,000 to just £10,000 a year (referred to as triggering the money purchase annual allowance). However, this rule doesn’t apply if you are cashing in pensions worth £10,000 or less. Under these rules, it’s possible to cash in up to three non-occupational pensions, without it impacting future contributions.

What you should do with any small pots ultimately comes down to personal preference. What makes most sense for you will depend on how likely you are to dip into your pension while you’re still working and how important it is for you to have more of your savings in one place.