Should you combine your pensions? Pros, cons and key checks

If you’re worried having several pensions scattered across multiple providers could mean you lose track of them, or cost you more in fees, you may want to consider consolidating your retirement pots.

But what is pension consolidation, and should you do it?

Pension consolidation just means bringing together multiple defined contribution pensions (there are different rules for defined benefit pensions) into one single pot with one single pension provider. This can be done in one of two ways: moving your other pots into one pension you already have; or moving all your pots into a new pension with a new pension provider.

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Pensions are a standard work perk in Britain today – usually with every new employment comes a new workplace pension into which staff are automatically enrolled. Older workers who have been in the workforce for decades can have half a dozen pensions floating around.

Having a large number of pensions can mean doubling or tripling up on admin and costs, and mean you lose sight of investment performance. Pension consolidation is a potential solution – but it’s not right for everyone.

Why would I consolidate my pensions?

Savers considering pension consolidation are typically looking for a solution to a couple of problems:

1. They have too many pensions to comfortably keep track of. Some may even be ‘lost’.
2. They are paying unnecessary fees to pension providers because they have multiple pots all doing similar things (like being in similar default funds) but paid for separately.

Maike Currie, vice president of personal finance at PensionBee, a firm which provides pension consolidation services, said: “One of the strongest arguments for consolidation is the prevention of ‘lost’ pensions. Although it’s fair to say that often pensions aren’t necessarily ‘lost’, they’re simply scattered and often ignored.”

At least 4.8 million pension pots are currently considered ‘lost’ in the UK, according to research by PensionBee, with nearly one in 10 workers believing they have misplaced a pot worth more than £10,000.

That fragmentation can make it hard to keep track of how much you’ve saved, how your investments are performing and how much you are paying for that performance.

“Consolidation brings those pots together into one place, giving you a much clearer picture of how much you’ve saved and making it easier to engage with your retirement plans. It also helps reduce the risk of pensions genuinely being forgotten altogether,” said Currie.

Pros and cons of consolidating pensions

Here’s a quick run down of the main benefits and risks of consolidating your pensions from pension consultancy LCP.

Pros

1) Lower charges – many pensions taken out before automatic enrolment will have much higher charges, whereas under auto-enrolment the fees for modern workplace pensions are capped at 0.75% or less.

2) Better value when buying an annuity – one big pension pot can buy a better value annuity than lots of smaller pots

3) Rationalising your investment strategy – with scattered pots, it is almost impossible to be clear how your money is invested and to ensure you have the right level of risk and return for your individual situation.

4) Easier to manage the pension paperwork – this will become more important once unused pensions are included in inheritance tax calculations from April 2027

5) Benefiting from the latest investment innovations – many old pots may be invested with a UK bias or may not take advantage of asset classes which have become more mainstream in recent years.

Cons

1) Giving up valuable product features of old pensions, including ‘guaranteed annuity rates’ (GARs), which promise an often attractive annuity rate compared with current market rates – a feature which may be lost on transfer.

2) Lack of diversification of pension provider and potentially fund manager

3) Giving up ‘small pot privileges’ such as the ability to access pots under £10,000 without triggering the ‘money purchase annual allowance’ – a tight limit on tax-relieved future pension saving.

4) Giving up on other ‘protected’ features of your old pension, such as higher rates of tax-free cash (on older pension policies) and the ability to access it before the proposed normal minimum pension age of 55 (rising to 57 by 2028). You should always seek professional financial advice should you feel any of your policies could contain these.

5) Risk of exit charges to leave your old pension. The cost of transferring varies between providers. Exit fees are capped if you are close to retirement, so in a lot of cases, the exit costs do go down with time and may not apply anymore to your policy.

Will consolidating my pensions save me fees?

While savings vary, consolidating your pensions can reduce duplicated charges. Over decades, even a small fee difference can translate into thousands of pounds more in retirement savings. Currie, from PensionBee, gave the following example:

Imagine someone has four separate pension pots worth £10,000 each (£40,000 in total). Each older scheme charges around 1% a year in fees. At 1%, they would pay about £400 a year in total charges. If they consolidated into a single lower-cost pension charging 0.5%, annual fees would fall to around £200 a year – a 50% saving.

Currie said: “Here’s the rub: Pensions are the ultimate long term investment where the power of compound interest really comes to the fore and the real impact of this saving will come from compounding over many years.”

For example, over 25 years, assuming 6% annual investment growth (in line with what the MSCI global index has returned over the long-term) staying in the four higher fee pots (£40,000 saved in each) could leave you with a total pension pot of about £135,500 by PensionBee’s calculations (a net return of 5% with 1% in fees deducted).

However, consolidating your pots into a lower-fee plan charging 0.5%, the net return will be 5.5% a year, which could result in £40,000 roughly turning into a total of £152,400.

“That’s a difference of around £15,000 over 25 years, simply from lower charges – without contributing an extra penny,” Currie explained.

Also, with some pension schemes, when the fund value of the pension goes above a certain amount, you receive a discount on your whole pension, which you may not qualify for if you spread the contributions across different providers.

How will consolidating my pensions affect my investments?

One of the main misconceptions about transferring all your pensions into one is that you will reduce your investment diversity, which is not necessarily true.

If you look at and compare all of your pensions you might find they’re not diversified at all currently, because they’ve stayed in the ‘default’ funds offered by each provider and these are often very similar – for example, they might be all UK funds.

By comparison, if you find a new provider with a good selection of funds, you can have a range of investments all held within the same pension plan.

Also when pensions are consolidated into one, monitoring investment performance can be much simpler. Pension providers tend to report past performance in different ways and times – one may come at the beginning of the year, another in the middle and the other at the end. If you have one pension, you know every time where you stand and how it is performing.

Another investment issue to consider is whether your current policies are still right for your risk profile and risk tolerance, which can change over time. If your pensions are all in one place, it can help you to more clearly see if the underlying investment strategy is still suitable for you.

This is crucial to review at least every three years, and you may now find that your old pensions are invested in portfolios that are now too low or high risk for you.

Different pension providers offer different strategies – some might have 10 options while others might have many more to choose from. It’s about understanding what the right investment option for you is and then consolidating your pension savings into the right strategy.

Flexible pension options

You may want to transfer your pensions in order to give yourself greater choice and flexibility with your retirement savings. Some pension schemes which were established before 2015 (prior to the pension freedoms rules) may not have the flexible options that other newer pensions have.

Income drawdown (also known as flexi-access drawdown) came into effect in 2015 and it allows you to access your pension savings whenever you need to from age 55, while reinvesting your remaining funds in a way that is designed to provide an ongoing retirement income.

If you retain an older pension, when the time comes for you to access it, you might have to transfer it anyway to another one in order to receive the benefits you are looking for, like flexi-access.

Pension consolidation and retirement goals

As you’ll only receive statements for one plan, record keeping becomes much easier. This is particularly useful if you want to make a large, one-off contribution and to make use of your pension carry forward allowance to mop up any unused allowances from the previous three years.

It can end up being quite a mammoth task if you have a multitude of pensions that you’ve been contributing to, because you have to contact each provider for information and, basically, you’ll be held back by the slowest one of them.

Finally, consolidating your pensions into one policy, where appropriate, and even just beginning this exercise of reviewing each of them, will enable you to have a far clearer picture and understanding of what you have built up so far, what you may need to continue to save and all your income options in retirement.

Camilla Esmund, senior manager for consumer campaigns, financial education and retail investment analysis at Interactive Investor, said: “Having everything in one place makes it easier to know where you stand, if you're saving enough, and whether you're on track for the retirement you want.”

You may even find you can retire earlier than you thought.

Is pension consolidation right for me?

The main aspect to consider during the review of your pensions and any before consolidation is what might be lost – as this can outweigh what you gain in lower fees and simplification.

Some older pension policies could have valuable guarantees, such as a guaranteed minimum pension or protected higher tax-free cash percentages. These could be lost on transfer.

If your old pensions don’t have any of these guarantees, however, consolidation could be right for you as a way to keep track of your retirement pot, keep costs down and flexible options open.

Currie from PensionBee said: “Consolidating pensions can be a powerful way to simplify your financial life – giving you a sense of control and clarity. Bringing scattered pots into one place makes it easier to see how much you’ve saved, and how your underlying investments are performing. It can also potentially reduce duplicated fees so more of your money stays invested.

“Of course it isn’t a one-size-fits-all solution. Some older schemes come with valuable guarantees that could be lost on transfer, and defined benefit pensions in particular often offer benefits that are hard to replicate elsewhere. The key is always to weigh up convenience and cost savings against what you might be giving up.”

As always, it is best to seek professional financial advice to understand all your options before making any large financial decisions.