Should I merge my pensions? The pros and cons of pension consolidation
Most people who’ve changed jobs a few times have pension pots they haven’t thought about in years. One from an employer you left in your 30s, another from somewhere before that, and your current workplace pension ticking along in the background.
After a while you’ve got three or four separate pots, different providers, statements arriving at different times of year, and no clear idea what it all adds up to. It’s a situation millions of people are in. The Pensions Policy Institute found there are over 3.3 million unclaimed pension pots in the UK holding more than £31 billion. Most of that belongs to people who lost track after changing jobs.
Pension consolidation is the process of merging those pots into one. For many people it’s worth doing, but not always. There are cases where transferring a pension means giving up guarantees and benefits you simply can’t get back.
What does pension consolidation actually mean?
It means transferring your existing pensions into a single scheme. That could be a personal pension, a Self-Invested Personal Pension (SIPP), or sometimes your current workplace pension, depending on the rules of that scheme. The idea is to bring everything under one roof so it’s easier to manage and, aligned to your financial plan.
The case for consolidating
You’ll know exactly where you stand
When your pension savings are split across multiple providers, it’s almost impossible to get a clear picture of how much you’ve actually saved. You’re relying on annual statements that arrive at different points in the year, possibly to different addresses if you’ve moved. Pulling everything into one place means you can see your total pot at any point, check how it’s invested, and make decisions based on the full picture rather than fragments of it.
Older pensions can be expensive to run
This is one of the most practical reasons to consider consolidating. Pension charges have fallen considerably over the past two decades, but many older schemes, particularly those set up before 2000, still carry annual management charges that look expensive by today’s standards. Paying 1.5% a year when a modern alternative might charge 0.75% doesn’t sound like a huge difference, but over 15 or 20 years that gap has a real impact on how much you end up with. Although cost is just one factor, consolidating into a lower-cost scheme is one of the few ways to improve your retirement outcome without having to save more.
More choice over where your money is invested
Older pension schemes often have limited investment options. If you want a broader choice of funds, more control over how your savings are invested, or simply access to a better-performing range of investments, a modern pension or SIPP will typically offer far more flexibility than a legacy workplace scheme from 20 years ago.
You’re less likely to lose a pension
People lose track of pensions. It happens every day. When you move house, change phone numbers, or simply stop thinking about a pension from an old employer, the chances of it slipping off your radar increase. Sorting your pensions out while you know where they all are is far better than trying to track them down years later. We often have clients we’ve worked with for a number of years come across pensions they’d forgotten about entirely, which can make a meaningful difference to their retirement!
It makes things easier for your family
A single pension pot is easier to deal with from an estate planning perspective. Your nominated beneficiaries are in one place, and there’s one provider your family would need to contact rather than several. It’s a small thing, but it matters.
The case against consolidating
Some older pensions come with benefits worth keeping
This is the most important point in this whole article. Before transferring any pension, you need to check whether it carries any protected benefits, because if it does and you transfer out, you lose them for good.
Guaranteed Annuity Rates are one of the benefits to look out for. Some older pensions, particularly those taken out in the 1970s, 80s, and 90s, include a guarantee that you can convert your pot into a retirement income at a fixed rate that’s often far better than anything available today. Giving that up to consolidate into a cheaper or simpler plan isn’t necessarily a good trade.
Some older schemes also offer enhanced tax-free cash, meaning you could take more than the standard 25% of your pot without paying tax at retirement. Once you transfer, that protection disappears.
Final salary pensions are a separate matter entirely
If you have a defined benefit pension, also called a final salary scheme, the decision to transfer is a completely different conversation. These schemes pay you a set income in retirement based on your salary and how long you worked there. They’re not affected by investment performance, they often increase in line with inflation, and they may pay out to your spouse after you die.
Transferring out means swapping that guaranteed income for a pot of money that’s subject to investment risk. That’s a significant trade-off, and for most people it’s not the right one. The rules reflect this: if your defined benefit pension is worth over £30,000, you’re legally required to take regulated financial advice before you can transfer it.
A consolidated pension isn’t automatically a better one
Combining your pensions only helps if the scheme you’re moving into is well-suited to your goals and aligned to your financial plan. Moving everything into the wrong plan just creates a different set of problems.
Speak to an adviser first
At Fairview, we help clients across Essex work out whether consolidating their pensions makes sense for them. Sometimes it clearly does. Sometimes the benefits in an old pension are worth far more than any savings from moving it. We’ll give you a clear, honest view so you can decide what to do with confidence.
Get in touch with us to arrange a conversation with one of our independent financial advisers.