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

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.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

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.

Advertisement
Advertisement - Article continues below

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.

Advertisement

Recommended

Visit/513684/companies-cut-back-on-their-pensions-bills
Personal finance

Companies cut back on their pensions bills

Britvic is the latest firm hoping a cheaper inflation index will cut pension costs. David Prosser reports.
28 Aug 2019
Visit/509683/good-news-for-savers
Pensions

Good news for pensions savers from HMRC

HMRC has withdrawn its appeal over breaches of the pensions lifetime allowance.
28 Jun 2019
Visit/502738/dont-miss-the-pensions-deadline
Personal finance

Don’t miss the pensions deadline

There are just five weeks left in the 2018-2019 tax year, so make sure you’ve made full use of your allowances.
6 Mar 2019
Visit/501351/doctors-shouldnt-get-special-treatment-for-their-pensions
Pensions

Doctors shouldn’t get special treatment for their pensions

Doctors whose pensions are too big want an exemption from the lifetime allowance. They shouldn’t get it, says Merryn Somerset Webb.
30 Jan 2019

Most Popular

Visit/investments/commodities/gold/600686/gold-and-silver-bull-market-2020
Gold

Want to make money in 2020? Gold and silver are looking like a good bet

If you want to make money from investing, says Dominic Frisby, it’s simple: find a bull market and go long. And in 2020 gold and silver are in a bull …
22 Jan 2020
Visit/economy/600667/money-minute-wednesday-22-january-uk-public-borrowing
Economy

Money Minute Wednesday 22 January: UK public borrowing

Today's Money Minute looks ahead to the latest on of the UK's public finances, with the Office for Budget Responsibility’s forecasts for borrowing thi…
22 Jan 2020
Visit/economy/600690/money-minute-thursday-23-january-european-interest-rates
Economy

Money Minute Thursday 23 January: European interest rates

In today's Money Minute we look ahead to Christine Lagarde's second interest-rate-setting meeting at the European Central Bank.
23 Jan 2020
Visit/investments/stocks-and-shares/share-tips/600653/indias-small-and-mid-cap-stocks-are-set-for-big
Share tips

India’s small and mid-cap stocks are set for big gains – here are three to buy now

Each week, a professional investor tells us where he’d put his money. This week: David Cornell of the India Capital Growth Fund highlights three favou…
20 Jan 2020