Consolidating pensions: The what, the how and the why

How many different jobs do you think you’ll have in your lifetime?

Estimates say the average number for UK workers is six but could be up to 12 for younger workers.

Either way, the idea of a job for life – and a pension to match – is for most people a thing of the past.

Thanks to auto-enrolment rules, all employers must now provide a workplace pension scheme. Combine this with regular job changes and potentially periods of self-employment and you have the prospect of dealing with multiple pension pots as you plan for retirement.

This could cause financial and logistical headaches, as well as a mound of paperwork. As a result, many people consider consolidating pensions into a single pot.

But is this always the right thing to do?

With inheritance tax (IHT) set to be introduced on pensions very soon, how does this process fit into your overall estate planning and preserving wealth for future generations?

And if you do decide to consolidate your pensions, how do you go about it?

Pension consolidation is a common issue which I come across when advising clients about their pensions and retirement planning so I’m going to take a practical look at consolidating pensions, the factors you need to consider and some of the things you need to watch out for.

What type of pension do you have?

A key consideration with consolidating pensions is the kind of pensions you possess. Broadly speaking, these can be divided into defined benefit pensions and defined contribution pensions.

Defined benefit pensions

Commonly known as ‘final salary’ pension schemes, these are less prevalent than they used to be, although some older pension savers and those working in specific sectors such as public services do have them.

With defined benefit pensions, how much you get when you retire is based on your salary and how long you’ve worked for your employer.

Generally, defined benefit schemes are not suitable for consolidation since you could lose value and benefits if you ‘transfer out’. In fact, it is mandatory to take financial advice if your defined benefit scheme is valued at £30,000 or more and you are considering transferring out.

Defined contribution pensions

Also known as ‘money purchase’ schemes, defined contribution pensions are the most common form of workplace and private pensions.

Defined contribution pensions are where you build up a pot of money based on the contributions you (and your employer, in the case of a workplace pension) have built up over time and which is invested by the pension firm operating the fund.

If you move jobs, you can either leave the pension where it is (even though you are no longer paying into it) or you can consolidate the pension by transferring it to a new pension scheme, whether that is a private pension or a workplace pension at a new employer.

What should you consider when consolidating pensions?

Consolidating pensions can simplify administration and lower overall fees but you should still bear in mind several factors before deciding whether to stay or go, including:

1. Perks in your existing pension – some older defined benefit schemes can include bonuses such as guaranteed annuity rates or more flexible ways to take retirement or death benefits. Check with the pension provider and take financial advice before deciding what to do with your pension pot.
2. Charges and penalties – every pension fund has its own annual management fees which can range quite considerably. Many funds also operate financial penalties for those looking to leave. Check with your provider what charges and fees operate on your pension before deciding on whether to transfer.
3. Keeping track – the more pensions you have, the harder it can be to keep up with them, particularly if you move home. Can you manage to keep track of all your different pots?
4. Investment choices – are your defined contribution pensions invested in the right way for you? Many schemes have a default investment strategy which might not be the right level of risk and reward for your financial priorities. In such cases, transferring to a more appropriate scheme could suit your circumstances much better.
5. Annuity rates – an annuity provides a guaranteed level of income for the remainder of your life in exchange for your pension pot. Consolidating pensions to create a larger pension pot could improve the income you get in retirement if you decide to buy an annuity.
6. Pot size – if you have small pensions pots (under £10,000) it might not be best to consolidate due to tax relief rules. A financial adviser will explain in more detail if you have smaller pots you’re considering consolidating.
7. Employer contributions – if you have a pension pot which your employer is currently contributing to then you could risk losing out on these contributions by consolidating this pension. If the scheme isn’t performing particularly well, you can regularly sweep the money into a pension you prefer, but make sure you take expert advice on the best way to do this.

It could be the case that if you have several different pensions, some may be better consolidating while others are best left alone.

This is one of the reasons why getting expert advice from an independent financial adviser is really important, particularly if you have complex pension arrangements or high value pensions.

At Fairstone, we can help you navigate your way through all these different considerations to come up with comprehensive recommendations about the best way forward.

How should you consolidate your pensions?

If consolidating pensions is something you have decided to do, how should you go about it?

Step 1 – Compile your existing pensions

Get details on providers, policy numbers and current valuations of each pension pot. If you’re missing paperwork or can’t remember which provider was with which employer, then contact previous employers to get that information. If you think you have a pension but are unsure about the provider or the employer, try the free Government Pension Tracing Service who may be able to help.

Step 2 – Review the terms and conditions

Make sure you take a good look through the small print of each one of your pensions. As mentioned earlier, there could be perks you might miss out on or penalties you have to pay if you choose to consolidate a particular pension.

Step 3 – Choose a pension to consolidate into

You might choose to transfer your pensions into your current workplace pension, an existing private pension or set up a brand new pension. Whichever route you choose, you should check out the rules on transfers to the destination pension to make sure you can carry out your plan.

Step 4 – Transfer your pensions

If you’re sure you want to consolidate pensions then you should inform the provider of your destination pension of your plans. You will need to check that the scheme you want to transfer allows you to do so and that the destination pension will accept the transfer. If all that is fine, then the consolidation process can start.

How can a financial adviser help?

A financial adviser can help with all four steps of the consolidation process outlined above, giving you expert insight into all aspects of the transfer and assisting with the various forms and paperwork required.

At Fairstone, we have helped many clients with advice on consolidating their pensions and assistance throughout the process.

As well as the nuts and bolts of combining pensions, a financial adviser can also help with the wider aspects of pensions and retirement planning to ensure your funds are working hard for you and that you are saving enough towards providing the retirement you want.

For example, with pension wealth attracting inheritance tax (IHT) from April 2027, getting expert advice on how best to preserve your pension could be crucial when it comes to estate planning and preserving wealth for future generations.

Your adviser can also help you plan for unexpected future events with advice on financial protection options.

And in a sector where scams are unfortunately a fact of life, consulting an independent financial adviser is a great way to sense-check pension offers which seem too good to be true.

Conclusions

Consolidating your pensions can help cut down on costs, streamline your life admin and boost your retirement pot, but it’s a process which requires careful consideration.

Getting expert advice at an early stage can really pay dividends and help you on your way to a better retirement.

THIS ARTICLE IS FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, TAX, OR LEGAL ADVICE.

TAX TREATMENT DEPENDS ON INDIVIDUAL CIRCUMSTANCES AND MAY CHANGE. ALWAYS SEEK PROFESSIONAL ADVICE BEFORE MAKING FINANCIAL DECISIONS.