How to consolidate pensions

Transferring multiple pensions into a single scheme could cut costs and streamline your finances. We explain the pros and cons of pension consolidation.

Consolidating your pension Step-by-step instructions
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How many separate pension pots do you have? 1? 3? 5? No idea? If, like many people these days, you’ve moved jobs several times over your career (or expect to do so), by the time you retire, you could end up with more pots than you have fingers. Keeping track of all that financial paperwork is nobody’s idea of fun. Consolidating multiple pots into a single scheme could make it much easier to keep track of your pension’s performance. We explain how to consolidate pensions and the potential benefits of doing so, plus highlight the circumstances in which you almost certainly shouldn’t.

What is pension consolidation?

Pension consolidation is the process of transferring multiple pension pots into a single scheme. You can either set up a brand new pension scheme to transfer other pensions into or (subject to its terms) consolidate other pots into one of your existing schemes.

What are the benefits of pension consolidation?

There are a few key positives to consolidating multiple pensions into a single pot:

  1. It simplifies matters. Over their lifetime, most people will have multiple jobs. That will usually mean multiple pension pots. That’s not even taking into account any personal pensions you have. The more pensions you have, the more paperwork there is to keep track of…and the greater the chance of you losing track. A consolidated pension pot is likely to be much easier to manage than lots of separate ones. You’ll have more time to pay attention to how your investments are performing and how much you’re paying in fees.
  2. It could save you money. If some of your pension plans have high fees attached, moving them into a scheme with lower charges could mean you end up with more in your pension pot come retirement. However, watch out for exit penalties on previous pensions, particularly older ones. They could cancel out the benefits of switching.
  3. It opens up investment options. Some pension schemes offer a wider choice of investments than others. For example, if you want to pursue an ethical investment strategy, you can look for a scheme that allows you to prioritise this. Or, if you want more control over your investments, you could consider a self-invested personal pension (SIPP).

Can I consolidate workplace pensions?

Usually yes, with one caveat. If you are fortunate enough to have a “gold-plated” final salary scheme, while technically you probably can consolidate it, you’ll almost certainly want to keep it right where it is. We explain why in more detail below.

With defined contribution (DC) workplace pensions, where the amount you’ll have when you retire depends on investment performance, consolidation is worth considering. You can do either of the following:

  • Consolidate as you move jobs, moving your pension with your previous employer into each new employer’s pension scheme (this won’t happen automatically).
  • Consolidate any number of old workplace pensions into your current workplace pension or into an entirely separate, personal pension.

Can I consolidate personal pensions?

Yes. Arguably, it’s less likely that you’ll have built up a large number of personal pension pots over time, as you will have been in control of setting any personal pensions up and paying into them in the first place. But if, at one point, there was a good reason for having multiple pots, but you now want to merge them into a single scheme, this shouldn’t be an issue.

Can I consolidate the state pension?

No. This is an exception to the consolidation rule. Unlike most pensions, you don’t pay directly into the state pension. Instead, its value is linked to your National Insurance contributions. The income you’ll receive is capped at the same maximum amount for everyone (based on the new state pension rules). It’s fully managed by the government and it’s not possible to combine your state pension “pot” with any other pension.

What types of pension can I transfer other pensions into?

You can transfer existing pensions into most other types of defined contribution pension schemes. These can include both workplace pensions and personal pensions (including SIPPs).

Most schemes will accept transfers in of other pensions. Check this before you get too far down the line, just in case.

Can I save money by combining my pensions?

Potentially. All else being equal, you’ll save money by transferring a pension with an annual management charge (AMC) of 1% to one with an AMC of 0.5%.

Of course, it isn’t quite that simple (when is it?). You’ll also need to take into account any fees to transfer out of a pension, set-up fees if you’re transferring into a new pension and even the nature of the investment options available. Some investments have the potential for higher growth than others – though these usually also come with a higher risk of loss.

Should I consolidate my pensions?

There’s no absolute answer to this. It depends on the number and type of pensions you have, how much they cost in charges and how significant the benefits are of merging them into a single scheme. You’ll also need to consider any downsides, such as exit penalties and the risk of losing valuable features that existing schemes might have.

One rule that almost always holds true, however, is that if you have a final salary scheme, it’s almost always best to leave it where it is.

Why you should think twice before consolidating a final salary pension

Danny Butler

Finder insurance expert Danny Butler explains

There’s a reason final salary (also known as defined benefit, or DB) pensions are referred to as “gold plated”. It’s because they’re valuable and increasingly rare. Once upon a time, they were the standard pension type you’d be offered by an employer. Unlike defined contribution (DC) schemes, where the ultimate value of your pension depends on investment performance, with defined benefit pensions you’re guaranteed an income for life that’s equivalent to a proportion of your salary when you leave the company. The amount depends on how many years you work for the company.

Consolidating a defined benefit pension will almost certainly mean moving it into a defined contribution scheme.

This will effectively mean translating the value of your DB scheme into a cash value, which is then transferred to a DC scheme and invested. In some cases, employers are even willing to pay an extra incentive to persuade you to switch (as DB schemes are expensive for employers to run).

But even with such incentives, giving up the certainty of a guaranteed income for life will almost certainly leave you worse off in the long run. In fact, with some public sector DB schemes (including NHS and teachers’ pensions), there’s a ban on transferring your pension to a DC scheme. With private sector schemes, it’s usually permitted, but it’s usually only worth contemplating in specific circumstances. For example, if you are in poor health and have a lower life expectancy than average, you may be of the view that you won’t be able to reap the maximum benefits from a lifetime of guaranteed income. In this case, transferring to a DC pension would give you the flexibility to take bigger lump sums and/or a higher income over a shorter period.

However, you should also bear in mind that most DB schemes continue to pay an income to financial dependants after you’ve gone. Transferring out of the scheme will do away with this benefit.

The good news is that it’s unlikely to be a decision you have to make alone. Unless the value of the pension is less than £30,000, anyone looking to transfer out of a DB scheme is obliged to take regulated financial advice to help them weigh up the pros and cons.

Are there any other reasons not to consolidate my pensions?

Even if you have a defined contribution pension, there can be a few other reasons to pause for thought before taking the consolidation leap.

  • If your plan has a guaranteed annuity rate (GAR). These guarantees may allow you to buy an annuity at a preferential rate. This will give you a much higher annuity income than you would otherwise get. If it’s not clear from your pension paperwork whether you have a GAR, contact the pension provider to ask. If you have a GAR, you’d lose it by transferring to a different scheme. As such, if you are considering using your pension pot to buy an annuity when you retire, it’s probably best to leave that pot where it is.
  • If your scheme has other benefits that you’d lose by switching. Some schemes allow you, for example, to take a higher tax-free lump sum or extra death benefits (the benefits payable to your beneficiaries if you die before taking your pension).
  • If there are high fees to transfer a pension. Hefty exit penalties on some schemes will eat into your pot’s value. In this case, you’ll need to assess whether the pros of switching (greater convenience, potentially lower annual management charges) outweigh the cons.
  • If a pot is worth less than £10,000. This may sound counterintuitive, as having multiple small pots would usually be a good reason to combine them. The full explanation is a bit complicated. But, essentially, if you’re considering taking a pension lump sum before you actually retire but still want to carry on making payments into a scheme, how much you take as a lump sum can affect the tax relief you receive on future contributions. This is under something called the Money Purchase Annual Allowance rules. However, you can often take the full amount of pots this small without it affecting your allowance. You can do this up to 3 times for personal pensions; the limit is different for workplace pensions, so you’ll need to check with the provider. If there’s a chance you might want to go down this route, it could be worth keeping small pots separate. Withdrawing pots this small also won’t count towards your lifetime allowance. This is the maximum amount you’re able to hold across all your pension pots without incurring an extra tax bill when you start taking money out.

Can I consolidate a pension that my employer is paying into?

Depending on the terms of the scheme, you might be able to. But you probably shouldn’t (unless it’s a different workplace scheme with the same employer). Moving an existing workplace scheme into a personal pension, for example, would probably mean losing your employer’s contributions. And these are well worth having.

Are there any penalties for consolidating pensions?

There aren’t any penalties for consolidation, per se. But with some pension plans, you’ll pay exit penalties to leave the scheme, which amounts to the same thing. They can add up to thousands of pounds, so make this one of the first things you check when you’re considering a transfer.

How can I consolidate my pensions?

If you’re using a financial adviser, they will usually manage the consolidation process for you. You may need to fill in a few forms.

If you’re managing the consolidation process yourself, there are a few steps to follow.

  • Step 1: Ask the pension provider or scheme administrator for the current amount you have in your pot (the “transfer value”). Bear in mind this may change by the time you actually transfer, as a result of changes in investment value.
  • Step 2: The provider will give you a document that sets out the transfer value, details of any extra benefits, information on any exit penalties and any other information the new scheme will need if you go ahead with the transfer.
  • Step 3: Fill in any forms required to initiate the transfer process. These may be online or paper forms, depending on the scheme you’re transferring to. In some cases, you may have to fill in forms for your existing provider too. The new provider will usually contact your existing provider to arrange the transfer.

Once you’ve started the process of transferring to a new pension scheme, your existing provider must move the pension across to the new scheme within 6 months.

Can I cancel a pension transfer?

Simply asking an existing provider for information about the transfer value won’t commit you to anything. Even once the transfer process has started, you may be able to pull out (check the terms before you give the go ahead). Even once the money has been transferred, you’ll receive a cancellation notice and will usually have 30 days to cancel the transfer. But, and it’s an important but, that doesn’t mean that your previous pension scheme will be willing to take your money back. Many won’t. So, while you can choose another new or existing scheme to transfer to instead, you probably won’t be able to reverse your decision entirely.

In short: don’t go ahead with a transfer unless you’re certain it’s the right choice.

Should I transfer my previous workplace pension if I change jobs?

There’s no right or wrong answer to this. If you change jobs, your previous workplace pension won’t be transferred automatically, but you can usually choose to have it transferred to your new employer’s scheme. This may work out as more convenient, as it reduces the number of pension pots you need to keep track of. But before you crack on, check for any exit penalties and compare the ongoing charges on both schemes. There’s no point in moving your pension into a more expensive plan just to keep things simple.

And, if your previous workplace pension was a final salary scheme, it’s almost certainly best off left right where it is. Moving it risks losing significant benefits.

Do I need a financial adviser to consolidate my pension?

Usually not. If you’re confident doing so and are willing to put in the legwork to make sure you choose the right scheme to consolidate into, then you can go ahead without advice.

There is an exception to this rule though. If you have what’s known as “safeguarded benefits” on a pension, and the value of the benefits is worth more than £30,000, you’ll have to get regulated financial advice before transferring money out of the scheme. Legitimate pension providers won’t be willing to accept your money unless you’ve received this advice. This rule applies to, for example, final salary pension schemes or defined contribution schemes with a guaranteed annuity rate. It was put in place to reduce the risk of people giving up these benefits without fully considering the implications.

With more standard types of DC pension, you can consolidate without advice, but unless the sums involved are very small, it’s still often wise to seek it out. The cost of doing so could be a price worth paying to avoid an expensive mistake with the money you’re relying on to fund your retirement. If you get regulated advice, the adviser is responsible for the recommendations you follow. If you follow their advice, and it turns out to have been a poor choice, you can complain and potentially get compensation.

Pros and cons of consolidating pensions

Pros

  • Streamlines your finances by giving you fewer pension pots to keep track of and manage
  • You could pay less in ongoing charges if you move from schemes with high charges to a more competitive one
  • Potential to gain access to a wider range of investment strategies or specific investments (particularly with a SIPP)

Cons

  • It’s not worth transferring from a scheme with lower charges to one with higher charges just to keep things simple
  • It’s rarely worth transferring out of schemes with safeguarded benefits, such as final salary pensions or schemes with guaranteed annuity rates
  • Exit penalties for leaving a pension may outweigh the benefits of consolidation

Bottom line

In the right circumstances, consolidating multiple defined contribution pension pots into a single scheme can cut down on paperwork and could even leave you with more in your pot come retirement. But it’s not a step to be taken hastily, and in some cases, shouldn’t be taken at all. Always do your research and weigh up the pros and cons we’ve highlighted in this article. And, if in doubt, consider regulated financial advice. It could end up saving you more than it costs.

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