Should you combine your pension pots? It can make retirement investing easier (and potentially cheaper)… but beware losing valuable perks
- Many savers have at least two pensions, and it’s easy to rack up a lot more
- The higher the number, the more likely you are to lose track of them
- Merging old pots can bring benefits, but there are also pitfalls to avoid
Savers often collect a string of pension pots during their working lives but many never bother combining any of their pensions.
Multiple pension pots can be built up from a combination of different employers and also saving into a variety of personal pensions over the years.
But the higher the number of different pensions you have, the more likely you are to lose track of them. And a tidying up exercise can reduce fees and paperwork and bring new retirement investing options.
But merging pensions is not always advisable because you can risk losing valuable benefits – we look at the traps to avoid and what you need to know about combining pension pots.
Tidying up: Is it better to put all your pensions in one place?
Why do savers end up with so many pensions?
Auto-enrolment is very successful at getting people signed up to pensions, but a system built on inertia means many workers are likely to end up with a collection of pots they know barely anything about.
The number of orphaned pensions has soared in recent years, and the finance industry launched an initiative last year to help people find them – here’s what to do if any of your old pensions are missing.
Pension consolidation firms have sprung up to help people manage all or most of their pensions in one place, and this can be cheaper as well as more convenient.
However, many people are still inclined to hang on to traditional salary linked – known in industry jargon as defined benefit – pensions, due to the advantage of drawing a guaranteed income until you die.
There is usually a stronger case to merge new-style defined contribution pension, though even here there can be good reasons to keep them where they are – tax advantages and valuable guarantees on the upside, and exit penalties on the downside.
What’s the difference between defined contribution and defined benefit pensions?
Defined contribution pensions take contributions from both employer and employee and invest them to provide a pot of money at retirement.
Unless you work in the public sector, they have now mostly replaced more generous gold-plated defined benefit – or final salary – pensions, which provide a guaranteed income after retirement until you die.
Defined contribution pensions are stingier and savers bear the investment risk, rather than employers.
What to consider before merging your pensions
1. Guaranteed annuity rates
If these are high it can be worth sticking with an old pension and using it to buy an annuity. Rates on these have improved lately even without a guarantee, as interest rates have risen.
You have to get paid financial advice to move a pension worth £30,000 plus with a GAR attached.
2. Guaranteed fund returns
These are rare but it is worth checking the small print to see if you benefit.
3. Bigger lump sums
Some older company pensions allow you to take a tax-free lump sum of more than the typical 25 per cent.
If you have one of these, and want to withdraw a large sum at retirement – for home improvements, paying off the mortgage and so on – you might want to stay put. But if you don’t and the terms on the old pension aren’t very good, you could consider whether moving will get you a better deal.
4. Large exit penalties
Most default work pension funds are trackers with cheap charges these days. If you have a costly old pension with restrictive investment choices you could weigh the benefits of moving despite penalty fees.
But exit fees are capped at 1 per cent after you reach the age of 55, so it might be worth waiting.
5. Ongoing employer contributions
You will be getting free employer contributions into your current work scheme, and you don’t want to lose that cash coming into your pot.
6. Protected pension ages
It depends on the scheme rules so check them, but you might not want to lose the opportunity to access a pension at 50, especially if you have several others which will kick in later.
What should you consider before ditching a final salary pension?
You should think about the following before abandoning this type of pension.
1. They are the most generous and safest pensions available
2. Employers are responsible for closing pension deficits
3. A lifeboat scheme, the Pension Protection Fund, is there if firms collapse
4. You bear the full brunt of stock market volatility after you transfer out
5. Inheritance rules are favourable, but might change.
7. Small pot privileges
If you have enough in your pension to potentially hit the lifetime allowance of £1,073,100 – the maximum you can save into a pension and keep getting tax relief – this is one to bear in mind.
Up to three small pots worth up to £10,000 each can be cashed without them counting towards your LTA.
It is not against the rules to breach the LTA, but you will face hefty tax charges on lump sums and regular income.
8. Final salary pensions
Outside the public sector, generous final salary pensions paying a guaranteed income until you die, plus valuable death benefits to surviving spouses, have virtually been wiped out.
Many savers have also voluntarily ditched these traditionally safe ‘gold plated’ pensions in recent years, tempted by huge transfer value offers, greater potential investment growth and the inheritance advantages of defined contribution pensions – you are not restricted to only leaving them to a spouse.
You are required to get paid-for financial advice if your transfer value is £30,000-plus, which is a longstanding safeguard against making mistakes you can’t take back later.