Should you consolidate your small pension pots?

Over two million small deferred pension pots are created each year as workers shift from one job to another at increasing rates.

If you have had several jobs, the chances are you have a deferred pension pot - this is a pension you no longer actively contribute to but hope to draw from when you retire. Thanks to auto-enrolment, deferred pension pots are now fairly common but not necessarily right for consumers as they can cost you money and limit growth.

Small pension pots can also easily be lost, meaning you could miss out on pension benefits when you retire.

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Most people take little action or are unaware of the costs associated with keeping several small pension pots, and consolidating them could make good sense.

The Department for Work and Pensions (DWP) has been exploring how to help employees better manage small pension pots and their costs. It proposes that “default consolidators” are created to sweep up small deferred pension pots worth less than £1,000.  This would be an automatic system where deferred pots go off to a third-party consolidator.

Following a consultation, the DWP said: "We have concluded that the multiple default consolidator model is the optimum approach to addressing the deferred small pots challenge and has the potential to provide greater net benefits to members, ensuring that members eligible deferred pots are consolidated into one scheme.”

This model would aim to consolidate an estimated 12 million small pots that are collectively worth £4 billion.

Pensions minister Laura Trott said a longer-term solution could be an Australian-style ‘pot for life’ system. She said: "In the longer-term, a simpler system of workplace pension saving could emerge to deal with the issue that new pension pots are created each time someone starts a new job, for example, a lifetime provider model with each saver stapled to a ‘pot for life’, which may go further to solving this for existing and future pots.” 

The DWP is now exploring how a default consolidator framework would work, and what sort of choice savers would have over whether their small pension pots are merged. Its “Ending the proliferation of deferred small pension pots” consolidation will finish in September. 

But for anyone who has several small pension pots right now and wants to do something about it, there are things you can do to maximise your pension savings and keep costs low. 

What to do if you have a small pension pot

If you have small pension pots from a previous job - around £10,000 or less - then it may make sense to consolidate them.

You could consolidate it into a current workplace pension, where costs could be lower.

Benefits to consolidating your pension include: your pension is easier to manage and track, you may lower your fees, gain wider investment choice and get better value when buying an annuity.

However there are things to think about before you consolidate your pension, according to Steve Webb, former pensions minister and partner at consulting firm LCP.

“There are some cases where consolidation may not be a good idea, including where old pensions have valuable features (for example, guaranteed annuity rates) that are not available with new pensions.

“There are also ‘small pots privileges’ which could be lost if you consolidate – for example, a pot under £10,000 can be cashed out without triggering the ‘money purchase annual allowance’, but a pot of £15,000 cannot. Consolidation should therefore be done carefully and thoughtfully and not as a knee-jerk response.”

Webb added that for anyone thinking about consolidation, they should shop around to get the best deal and make sure the products suit their needs.

“If the current workplace pension is not suitable or not available, do not just go with whoever has the best TV advertising campaign.”

Of course, if you have a defined benefit pension, then you should probably leave it where it is. Though these are not available to most of the workforce today, anyone with one will have guaranteed benefits and they are considered ‘gold dust.’

If you are unsure about what to do with a defined benefit pension fund, it is always a good idea to seek financial advice before taking any action.

How to track down your small pension pots

One of the biggest problems with having loads of small pots is that you are likely to lose track. This is often done when you move home and forget to update your details with past providers.

Around £26.6bn sits in ‘lost’ pensions that have been forgotten about as people switch jobs frequently.

If you think you may have had a pension at a previous job but are not sure where it is held, you can get in touch with your old employer and simply ask for the details. Then, contact the pension fund and ask for an updated statement and consider if it is worth consolidating.

If you are unable to trace your old pension, you can also use the government’s Pension Tracing Service via gov.uk. However, this isn’t a speedy option and it may take some time to track down old pensions, so it may be worth going through old paperwork to see if you can find the details yourself first.