The advantages and disadvantages of consolidating pensions


When planning your retirement income, are you faced with multiple pension pots? It can be difficult to understand how to access each pension, when to do so and where to contribute if you’re still paying in. Consolidating pensions may be an option you’re considering, but it’s not always the right one.

The issue of how to manage multiple pensions is one that’s likely to grow for two key reasons:


  1. The introduction of auto-enrolment means the majority of workers over the age of 22 will now be eligible for a Workplace Pension.
  2. Employees today are more likely to frequently swap jobs than previous generations. Receiving a Workplace Pension with each job change means it’s not impossible that you’ll end up juggling ten or more pensions at the point of retirement.

It’s easy to see why consolidating may be appealing if you find yourself in this position. However, it’s important to weigh up the pros and cons of doing so before you proceed. Consolidating your pension may be an irreversible decision.

Steve Webb, Royal London Director of Policy, said: “One of the questions I am asked more than any other is whether people should combine all of their pensions in one place. Whilst that may seem the tidiest thing to do and can have some advantages, there are also a number of unexpected disadvantages to merging pension pots.

“Older pension policies may have attractive features which could be lost if transferred whilst small pots benefit from certain tax privileges which do not apply to larger pots. As ever, the best approach is to seek impartial advice or guidance before consolidating pension pots.”

The benefits of consolidating pensions

1. Have your savings in one place

This is one of the key benefits of consolidating pensions. Managing multiple pensions can be time-consuming and it can be difficult to work out expected income at retirement age. Consolidating pensions means your savings are all in one place. This can make it far easier to manage performance and contributions. You’ll also only have one pension to consider when it comes to accessing your savings.

2. Potentially reduce charges

Pension providers will take a fee from your pension for the services they provide, which can vary significantly between providers. Reviewing how much you pay for your various pensions may lead to finding out you could save money. Remember, your decision shouldn’t be based purely on fees. Paying a slightly higher fee can be worthwhile if the pension delivers higher returns or has other benefits, for instance.

3. Choose the investment option that’s right for you

Pension savings are usually invested, hopefully delivering growth over the long term. However, different pension providers may offer very different investment options. If you prefer the investment options with one provider, it can make sense to merge it with other pensions. There are some things to keep in mind here. Firstly, past investment performance isn’t a reliable indicator of future performance. Second, if all your retirement savings are invested in the same funds, a dip will have a larger impact on the overall value of your savings.

The cons to consider before consolidating

1. Losing benefits from existing pensions

Some pensions, particularly older ones, will have additional benefits that may be useful to you. For example, some pensions will allow you to draw out an initial tax-free lump sum that exceeds the usual 25%. Alternatively, some pensions were sold with a guaranteed Annuity rate that may be more competitive than today’s rates. Transferring out of a pension would usually mean benefits are lost. These can be extremely valuable, and you should always check what benefits your pension provides before transferring.

2. Potential exit penalties

Many pensions can be moved and merged without charges. However, there are some that have exit charges, costing you money to combine pensions. In some cases, the financial loss can be worth it but it’s something that you do need to factor in before you make a decision.

3. Tax benefits associated with small pensions

When you consider tax liability, there are reasons to keep some of your retirement savings in smaller pensions. For example, you can take up to three ‘trivial’ pensions, those with a value below £10,000, without counting against your Lifetime Allowance, If you’re close to the Lifetime Allowance of £1.055 million this can be useful. If you’re hoping to make a pension withdrawal and continue paying into a pension, small pensions can also be beneficial. You can access a small pension under £10,000 without triggering the Money Purchase Annual Allowance, which can reduce the amount you can save tax efficiently.

Having confidence in your retirement income

Decisions about your retirement income can affect you for the rest of your life. As a result, it’s normal to worry about whether you’re making the right decision. This is where working with a financial adviser can help.

We’re here to help you review your current pensions and explore the different options. We’ll take into account what your retirement goals are. There’s no one size fits all solution for managing pensions and this approach enables us to highlight the pros and cons that are relevant to you. Organising pensions so they’re accessible in a way that suits you is essential.

If you’d like to discuss your pensions and your options at retirement, please contact us. Our goal is to help you feel confident in the financial steps you’re taking, including consolidating pensions where necessary.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulations, which are subject to change in the future.