Beware the pension consolidation trap

published 25 September 2019

Stacks of pound coins © Getty Images — Do your research before you pile it all into one scheme

Combining your pensions in a single plan isn't the no-brainer it may seem.

Financial advisers and pension providers routinely tell savers to consolidate their disparate pension pots into a single plan. And with the typical worker now averaging 11 jobs over the course of their career each with its own pension this is often sound advice.

Holding all your pension savings in one place generates economies of scale and administrative simplicity. There is also less danger of forgetting about old pensions.

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However, before you rush to transfer your old plans into a single fund, do some research. Consolidation can sometimes prove to be an expensive mistake. Many older pension schemes offered valuable benefits that it is not possible to replicate today and which you'll lose by moving your money out of such plans.

In some cases, these benefits date from before April 2006. For example, pensions taken out since then cannot pay out more than 25% of the fund as a tax-free cash lump sum on retirement, but older schemes often offered significantly more.

Similarly, modern pension plans won't allow you to retire before the age of 55, but some older schemes let you draw your benefits earlier.

Will pension consolidation mean forfeiting income?

In addition, some pensions date back to a time when policy features reflected very different market dynamics. Many set up during the 1990s offered guaranteed annuity rates far above anything available today when converting savings into regular income; giving up those guarantees could cost you precious income in retirement.

Also consider the nuances of the current pensions system, where the rules on "small pot" pension funds can be very useful. If you have funds worth less than £10,000, you can cash them in without triggering new limits and allowances. You'll still be able to contribute to other pension plans, for example, and your lifetime pensions allowance isn't normally affected. This can provide important flexibility that you'll lose if all your savings are in one larger fund.

Finally, check what charges you'll have to pay to close down an old pension and move the money elsewhere. Some plans, particularly older ones, feature hefty exit fees that can take a chunk out of your savings. If these fees are high, you may not have time to make up for the effect of them on your pension fund in a better plan elsewhere.

Pension consolidation, then, isn't the no-brainer it is sometimes made out to be. For many people, it makes sense but only once you've checked you're not falling into a trap by moving your money. Take independent financial advice if you're not sure.

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.