Should I consolidate my pensions? The pros and cons

Do you have more than one pension? Should you consolidate them?

Here are the advantages and risks to consider before consolidating your pensions.

Many of us have several different pension plans throughout our working life.

Some might be 'defined benefit', where we are promised a set amount of money from a certain age, while others are 'defined contribution', where the only certain thing is what we and our employer have put in, plus any investment returns.

So, is it worth consolidating your pensions?

It’s natural to ask when we receive many different annual statements showing that some pensions perform better than others.

And when you have to write many change of address letters when you move, you might wonder if you need all those pension plans.

We reveal the pros and cons you should consider.

What is pension consolidation?

Pension consolidation, also known as combining or transferring pension pots, is the process of bringing together multiple pension plans into one single account.

Over your career, you may work for many different employers and so may build up a collection of different pension pots via various schemes. 

The pros of consolidating your pensions

There are several potential benefits to consolidating your pensions, from better investment performance to lower charges and simpler administration.

1. Does pension consolidation improve investment performance?

Some pensions have better investment options than others. So consolidating your pensions could help you take advantage of those and get rid of underperforming ones.

This is the biggest reason to consolidate since investment performance is a key factor in how much your pension grows and how much income you get. 

Poor investment performance can happen for a variety of reasons.

In older pension plans, you may be limited to a 'managed' pension fund run by the provider, which the provider may not have managed well or actively.

With other pensions, there may be a better choice of funds, but it may still be limited – some 'stakeholder' pension plans fall into this category.

Alternatively, it may simply be down to your original choice of investment funds, which needs reviewing and updating.

2. Can pension consolidation reduce charges and fees?

Charges levied by pension plans are also important.

Consolidating pensions could mean eliminating higher-charging plans (typically older ones), but it is not always easy to find information on the costs of a particular pension plan.

3. Does consolidating pensions simplify retirement admin?

Administration is easier if you don’t have to deal with many pension plans. For example, with changes of address and dealing with annual paperwork.

Also it may be easier to turn your pension into an income at retirement if you have fewer plans to deal with.

The cons of consolidating your pensions

Consolidating your pensions is not always the right move, and there are several risks and drawbacks to weigh up before making a decision.

1. The benefit of defined benefit pensions

A defined benefit ('final salary') pension is rarely worth transferring into a defined contribution or 'money purchase' plan.

That’s because you would take on the investment risk instead of the pension scheme.

There may be additional benefits, such as entitlement to a bigger lump sum or a higher guaranteed annuity rate, which you would lose.

Having said that, if you are concerned about the security of your pension in your employer’s scheme, you may be happier moving it elsewhere and having it under your control.

2. What pension benefits could you lose by consolidating?

Some defined benefit plans have additional benefits you would lose if you move that pension money elsewhere.

That could include a guaranteed annuity rate, the rate at which your pension is turned into an income, which will almost certainly be higher than you would get on the open market.

It could also include a higher-than-normal tax-free lump sum entitlement (25% is the normal maximum).

Our expert says: Carefully consider if consolidating your pensions is right for you

Lisa-Marie Voneshen - Senior Content Writer at Unbiased

“There are many benefits to consolidating your pensions, but it’s worth checking if you’ll lose valuable benefits if you go ahead and consider financial advice first, as this is an irreversible decision.

A defined benefit pension pays out a secure income for life and rises in line with inflation, while some pensions offer a guaranteed annuity rate, which could be higher than elsewhere.

It’s worth stressing you must get financial advice if your guaranteed benefits are worth £30,000 or more, but some providers may still recommend getting advice for pots below this amount.” 

3. What is a market value reduction on a pension?

If your pension is invested in a 'with profits' fund, there may be a 'market value reduction' applied.

Although that isn’t necessarily a show-stopper (the reduction might be quite small), it certainly needs considering.

4. How much does it cost to consolidate your pensions?

For most people, asking a financial adviser to look at their pensions is the best option.

That way, you can be sure that all the important factors are evaluated, but you have to consider the cost of getting financial advice.

Finally, you will be responsible for some of the work involved in consolidating, such as digging out policy numbers and addresses.

However, if the result is an up-to-date pension plan with the flexibility you require, one that you feel comfortable with and confident in, it will be worth the effort.

Why is it important to trace lost pensions?

You can never have too many contributions to your pension pot (well you can, but the pension limits are pretty high – most people will never exceed them), so it’s really important to track down old and unclaimed pensions and consolidate them.

And in the unlikely event that you have exceeded the savings limits, or may be about to, you’ll want to know about this in good time so you can avoid any tax penalty.

Most pension providers and former employers are obliged to send you a yearly statement, setting out an estimate of the income you might expect from the scheme on retirement.

If you’re no longer receiving these statements, perhaps because you’ve changed your address, opted out of the State Earnings-Related Scheme (SERPS) in the past, or have changed jobs, then it’s time to start tracing, because losing a pension can be costly.

Is pension consolidation right for me?

Before deciding whether you should consolidate your pensions, it's worth asking yourself a few key questions.

Your answers will help determine whether the benefits outweigh the risks in your particular situation.

Do any of my pensions charge exit fees?

Some providers charge a fee when you transfer a pension away from them.

Check the terms of each pension before initiating a transfer, as exit fees can reduce the overall value of your pot and affect whether consolidation is worthwhile.

Will I pay higher charges in my new pension?

Consolidating into a pension with higher annual management fees could cost you more over the long term, even if it simplifies your admin.

Compare the charges across all your existing pots and your proposed new provider before making a decision.

Will I lose any guaranteed benefits?

Some pensions come with valuable built-in benefits, such as a guaranteed annuity rate or enhanced tax-free cash, that cannot be replicated elsewhere.

If any of your pensions include these, consolidating could mean giving them up permanently.

Am I still paying into any of the pensions I want to transfer?

If you are still actively contributing to a workplace pension, transferring it could mean losing your employer's contributions.

Check with your provider before moving any pension you are currently paying into.

Do I have any defined benefit pensions?

Defined benefit pensions, also known as final salary pensions, are rarely worth consolidating into a defined contribution plan.

If your guaranteed benefits are worth £30,000 or more, you are legally required to take regulated financial advice before transferring.

Need help consolidating your pension?

Consolidating your pensions can be a complex decision with many factors to consider.

While there are potential benefits, there are also risks to consider.

A financial adviser can assess all your options, crunch the numbers, and help you determine if consolidation is right for you.

Let Unbiased match you to your perfect financial adviser today.