Pension & retirement
Harry Sims
Pension consolidation can reduce administration, potentially lower charges and make retirement planning easier for some people.
But is it right in every circumstance?
This is a question coming to the fore as the Government looks at ways to consolidate small, dormant pension pots.
Pension consolidation generally means transferring several pension pots into one pension or a smaller number of pensions.
People move jobs, leave old workplace pensions behind and then start again with a new employer.
Over a working lifetime, this can result in a collection of relatively small pension pots that are difficult to keep track of and expensive for providers to administer.
There are currently around 16 million deferred pension pots in the UK worth £1,000 or less.
The number is growing by around another million each year, according to the Department for Work and Pensions (DWP), which estimates that these small pots cost pension providers around £240m a year to administer.
The Government is looking at ways to consolidate small, dormant pension pots.
It has floated plans for certain small, dormant defined contribution pensions to be moved into authorised consolidator schemes.
The ambition is for the system to be operational from 2030, although the proposals are still under consultation and the final approach and implementation timetable may change.
The changes are summarised in the table below:
| Statistic | Figure |
|---|---|
| Deferred pension pots worth £1k or less | Around 16 million |
| Additional small pots each year | Around 1 million |
| Estimated annual administration cost | Around £240m |
| Target for authorised consolidator system | 2030 |
From April 2027, most unused pension funds and relevant pension death benefits will generally be brought into the inheritance tax net.
This change, combined with the Government push for pension consolidation, could encourage more people to look at the number of pensions they have and consider bringing them together.
For many people, that could make sense.
But it is not the case that consolidation is the right thing to do in every instance.
Bringing small pots together could reduce administration and make the pension system easier to manage.
For an individual, it can also make it easier to see how much they have saved and where their money is invested.
The same principle can apply to someone with several larger pensions.
If you are approaching retirement and have five different pension providers, bringing some of those arrangements together could make it easier to manage your investments, keep track and plan how much income you need to take during retirement.
So, pension consolidation can absolutely be the right thing to do. The problem is that not every pension is the same.
Some pension policies were taken out decades ago and contain benefits that are no longer available on modern pension contracts.
An older pension, for example, could have a guaranteed annuity rate, which may provide a significantly higher level of retirement income than someone could secure by buying an annuity from a modern pension.
Another pension might have a protected pension age, allowing someone to access their pension earlier than the normal minimum pension age.
There can also be protected or enhanced tax-free cash benefits (i.e more than 25% tax-free), depending on the terms of the individual policy.
These features can be worth considerably more than the difference between one provider’s annual charge and another’s.
More importantly, transferring the pension could mean losing those benefits permanently.
This is why, when I look at an older pension, I am not just interested in its investment performance and charges.
I want to understand what else comes with the pension and whether there are any benefits that would be difficult or impossible to replace elsewhere.
If there is a valuable benefit attached to the contract, it needs to be considered before any decision is made to transfer it.
The inheritance tax changes add another reason for people to review their pensions.
From 6 April 2027, most unused pension funds and relevant pension death benefits will generally be included when calculating the value of an estate for inheritance tax purposes.
The personal representatives of the estate (usually the beneficiaries) will be responsible for reporting and paying any inheritance tax due on those pension benefits.
This means the administration of an estate could become more complicated where someone has several pension arrangements.
The personal representatives will need to identify the pensions held by the deceased and obtain information from the relevant pension providers or scheme administrators.
Those administrators will then provide information about the pension benefits, beneficiaries and amounts involved so that the overall inheritance tax position can be calculated.
For someone with significant pension savings who does not expect to spend all their pension during retirement, this could be an important change.
It is easy to see why the changes might encourage people to think about pension consolidation.
If someone has accumulated several pensions over their working life, having all their retirement savings in one place could appear to make things easier for their family when dealing with their estate.
But making things easier for your family does not necessarily mean transferring everything into one pension.
There are other ways to make the administration of an estate easier, such as keeping a clear record of existing pensions, making sure beneficiaries know where the information is held and regularly reviewing the arrangements.
That could save your family considerable time without necessarily requiring you to give up valuable benefits attached to an existing pension.
And that is an important distinction. The fact that your family may have more pension administration to deal with after your death does not, by itself, mean that transferring the pensions during your lifetime is the right answer.
No, and this is where I think the distinction between the Government’s small-pot reforms and wider pension consolidation is important.
For example, a £500 pension that has been sitting untouched since someone changed jobs is very different from a £100,000 pension that contains a valuable guaranteed annuity rate.
Both are pensions, but they are not necessarily problems that should be solved in the same way.
Imagine someone has four pension pots.
One has high charges and limited investment options, another has a broad investment range and competitive charges, a third has a guaranteed annuity rate and the fourth has a protected pension age.
Putting all four into one modern pension would certainly make things simpler, but simplicity is not the only consideration.
The transfer could mean giving up benefits that are more valuable than the administrative convenience of having everything together.
Equally, keeping every pension simply because it is an old policy is not necessarily the right answer either.
If a pension is expensive, restrictive and offers no valuable benefits, consolidation could improve the position.
It comes down to understanding what you have before deciding what to do with it.
There isn’t a simple answer to this question.
For some people, bringing pensions together will reduce costs, simplify investment management and make retirement planning easier.
For other people, keeping pensions separate may be more appropriate because of the valuable benefits attached to individual contracts.
It may be worthwhile to think of the following comparisons when making a decision on pension consolidation:
| Consideration | Existing pension | New/consolidated pension |
|---|---|---|
| Annual charge | £x | £y |
| Investment choice | Limited/broad | Limited/broad |
| Guaranteed annuity rate | Yes/No | Yes/No |
| Protected pension age | Yes/No | Yes/No |
| Protected tax-free cash | Yes/No | Yes/No |
| Transfer charge | £x | N/A |
| Other benefits | Details | Details |
The number of pensions you have is not really the issue.
What matters is what each pension gives you, what it costs and what you might lose by moving it.
The Government’s plans to tackle small pension pots could make the system simpler for millions of savers, while the inheritance tax changes may encourage more people to review how their pensions are organised.
Both are good reasons to understand what you have, but neither is, on its own, a reason to move everything into one pot.
Sometimes consolidation will be the right answer, while in other circumstances keeping pensions separate may be more appropriate.
The important thing is to understand the difference before making a decision that may be difficult, or impossible, to reverse.
Getting expert advice can help to make the situation much clearer when it comes to whether or not to consolidate your pensions.
A financial adviser can:
Get in touch with an adviser today to find out more.
Disclaimer: 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. The value of investments can go down as well as up and you may not get back the full amount you invested. Past performance is also not a reliable indicator of future performance. Always seek professional advice before making financial decisions.
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Pension consolidation is the process of bringing money from multiple pension arrangements together into one pension or a smaller number of pensions. It can simplify administration and retirement planning, but the benefits and costs of transferring depend on the individual pensions involved.
There is no universal answer. Consolidation can simplify administration and potentially reduce costs, but transferring an older pension could mean losing valuable benefits such as a guaranteed annuity rate, protected pension age or protected tax-free cash.
Not necessarily. Each pension should be assessed individually before deciding whether to transfer it. The number of pension pots you have is less important than the benefits, charges, investment options and other features attached to each one.
Potential disadvantages include losing valuable safeguarded benefits, paying transfer or exit costs, losing access to certain investment options and moving into a pension with higher charges or less suitable features.
Yes. Some older pensions contain benefits that may be lost permanently following a transfer, including guaranteed annuity rates, protected pension ages and protected or enhanced tax-free cash.
The Government is developing reforms intended to address the growing number of small, deferred defined contribution pension pots. The article notes that the ambition is for the new authorised consolidator system to be operational from 2030, although the proposals are still under consultation and the final approach and implementation timetable may change.
From 6 April 2027 most unused pension funds and relevant pension death benefits will generally be included when calculating the value of an estate for inheritance tax purposes.
It can create additional administration because personal representatives may need to identify multiple pension arrangements and obtain information from different providers. However, that does not necessarily mean the pensions should be consolidated.
The inheritance-tax changes provide a reason to review pension arrangements, but the article’s central point is that the tax changes alone should not determine whether pensions are transferred. The benefits and drawbacks of each existing pension should be assessed first.
Yes. A financial adviser can review existing pension arrangements, compare their charges, investments and benefits, and assess whether consolidation is appropriate for your circumstances and financial objectives.
For further information, please contact:
Pension & retirement
Pension & retirement
Pension & retirement
Pension & retirement
Pension & retirement
Pension & retirement
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