The pros and cons of pension consolidation


Over the course of your life, it’s likely that you’ll have several employers and because of this, you’re also likely to have several workplace pensions.

If you’re approaching retirement, you may be tempted to consolidate these into a smaller number of funds so that they are easier to manage. This strategy can sometimes be a good idea, but you should also be careful of several pitfalls.

If you want to avoid these potential issues, read on to find out the pros and cons of pension consolidation.

The pros of consolidating your pensions

Consolidating can make them easier to track

The most obvious benefit of consolidation is that a smaller number of pensions is easier to keep track of. This can help you to ensure that they’re all growing as effectively as possible.

Due to the flexible nature of the modern job market, it’s likely that you may have worked in several jobs over your lifetime. Assuming that you have a workplace pension at all of them, you could be dealing with a sizeable pile of paperwork whenever you want to revisit your financial planning.

This can be made easier with pension consolidation, as you would have to request and review a far smaller number of pension statements to see your full pension fund.

It could increase the size of your pension

The difficulty of keeping track of multiple pensions can mean that you may lose track of pensions or leave wealth languishing in schemes with lower returns or under an administrator who charges a higher-than-average fee.

One benefit of pension consolidation is that, once you’ve analysed your pension schemes, you can work out which one typically performs the best or has the lowest charges. Once you know this, you could multiply the benefits by transferring all of your savings into one fund.

Generally, older pensions tend to have higher charges than more modern ones and so by transferring out of them, you could save yourself a lot of money over time. This is particularly true if you have contributed large amounts into such schemes.

You may have more control

A final benefit of pension consolidation is that modern pensions typically give investors a greater degree of freedom with fund choices, as well as the option to choose where to invest.

While you should be careful when choosing your own investments, this can give you a greater sense of control over your finances.

If you do have the option to choose your investments, it’s important to seek professional advice so that you can make informed decisions when growing your wealth.

The cons of consolidating your pension

There may be tax implications for doing so

One issue with consolidating your pensions is that you may potentially run into tax issues if you have significant pension funds.

This is because of the “small pot” rules that affect any pension worth less than £10,000. These rules state that you can take up to three small pots at once, with 25% of the value being tax-free.

The benefit of them is that small pots do not count towards your Lifetime Allowance, meaning that they can be used to avoid excess charges if you’re near your threshold.

If you consolidate your smaller pensions into a single larger one, you may lose this ability, which can potentially cause problems when you retire.

You may lose some benefits from your existing schemes

An important factor to bear in mind if you’re considering consolidating pensions is that some schemes have added benefits that you can only access if you remain a member until retirement.

For example, you may be able to get a guaranteed annuity based on favourable rates, but only if you don’t transfer your fund into another scheme.

Furthermore, some final salary schemes may offer a guaranteed minimum pension, which is promised at the outset. This benefit can pay you a much more generous amount than if you’d transferred to a defined contribution scheme.

You may have to pay a transfer fee

In some cases, you may have to pay a fee to transfer your pension to a new scheme. If you have multiple pensions, then you could be paying a considerable sum of money.

If this is the case, you would need to assess whether the long-term benefits of consolidating outweigh these short-term costs.

Speaking to a financial adviser can be helpful when considering whether a transfer is worth it, as you can draw on their knowledge and experience to make an informed decision.

Get in touch

If you’re considering consolidating your pensions but aren’t sure if it’s the right decision for you, get in touch. Please email or call 0115 933 8433.

Please note:

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up 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. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.