Beware the pension consolidation trap

Financial advisers and pension providers routinely tell savers to consolidate their disparate pension pots into a single plan. But it isn’t the no-brainer it may seem.

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.

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.

Recommended

Should you defer your pension and stay in work?
Pensions

Should you defer your pension and stay in work?

The pros and cons of deferring your pension and staying in employment beyond 66 are finely balanced.
15 Sep 2021
State pensioners probably aren’t going to get an 8% pay rise next year
State pensions

State pensioners probably aren’t going to get an 8% pay rise next year

The “triple-lock” could in theory mean an 8% rise in state pensions this year. But that’s not going to happen. Saloni Sardana explains what the triple…
6 Sep 2021
I wish I knew what a drawdown was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what a drawdown was, but I’m too embarrassed to ask

Drawdowns are an unfortunate part of an investor’s life. But what exactly is a drawdown?
31 Aug 2021
In a “defined contribution” pension? Cheer up!
Pensions

In a “defined contribution” pension? Cheer up!

Max King explains why today’s defined contribution pensions are in many ways better than the final salary pensions of old.
31 Aug 2021

Most Popular

The times may be changing, but don’t change how you invest
Small cap stocks

The times may be changing, but don’t change how you invest

We are living in strange times. But the basics of investing remain the same: buy fairly-priced stocks that can provide an income. And there are few be…
13 Sep 2021
Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
Should investors be worried about stagflation?
US Economy

Should investors be worried about stagflation?

The latest US employment data has raised the ugly spectre of “stagflation” – weak growth and high inflation. John Stepek looks at what’s going on and …
6 Sep 2021