Six questions to ask before combining your pension pots
Four in 10 pension savers are unsure whether they should consolidate their retirement pots, according to a survey by investment firm Hargreaves Lansdown.
It can be hard to keep track of your pensions, especially if you’ve moved jobs several times, with the average worker building up 12 in their life.
Here, Which? explains how consolidation works, the six questions you need to ask yourself first, and how consolidation could be made easier in the future.
What is pension consolidation?
Pension consolidation is when you combine two or more pensions into one pot.
Since the introduction of automatic enrolment in 2012, nearly 11 million people have been enrolled in a workplace pension – many for the first time.
The rules stipulate that every time someone changes jobs, they’ll be enrolled into a defined contribution (DC) pension scheme at the new workplace.
This could mean you end up with a large number of relatively small pension pots, which may be challenging to keep track of.
A pension transfer or combining all of your pensions could see you moving your money to a new home with another provider.
- Find out more: should I combine my pensions?
Six questions to ask yourself first
Transferring your pensions not only reduces admin but can also reduce the charges you pay.
However, deciding whether to combine all your pension pots isn’t a straightforward decision, as there are clear advantages and disadvantages.
If you’re uncertain about what to do, consult with a regulated financial adviser, but here are six questions to ask yourself first:
1. What type of pension do I have?
If you have a defined benefit (DB) pension – also known as a final salary pension – you have the option to transfer this to a DC scheme.
However, the Financial Conduct Authority and The Pensions Regulator believe it’s in most people’s best interests to keep their DB pension.
That’s because unlike a DC pension, a DB pension gives you a guaranteed income for life that usually increases each year.
If you have any other type of workplace pension – where success or failure depends on the performance of your investments – consolidation is worth considering.
- Find out more:should I transfer my final salary pension?
2. What am I paying in charges?
Moving your pensions can be a good way to reduce charges and ultimately boost the value of your pot.
Start by checking the charges you’re currently paying: if you aren’t able to find these figures from your annual statement or via an online portal, contact your scheme administrator or pension provider directly.
Under auto-enrolment rules, annual management charges are capped at 0.75%, although average charges are around 0.5% and can be as low as 0.2-0.3% in some workplace schemes.
But if you have a pension that predates auto-enrolment, charges can be higher than 0.75%.
- Find out more:compare pension drawdown plans and charges
3. Is my annuity rate guaranteed?
Some DC pensions from the 1980s and 1990s had a guaranteed annuity rate (GAR), which will be higher – sometimes around double – than what’s available on the rest of the annuity market.
The GAR will have been set in the terms and conditions of your pension policy when you took out the policy.
If you have an older pension, check with your provider to see if it includes a GAR. If so, you’re likely to be better off leaving your money where it is.
- Find out more:how to find the best annuity rate
4. How much is my pension worth?
Taking money from your pension usually triggers the Money Purchase Annual Allowance (MPAA), which limits the amount you can pay into your pension and still get tax relief of up to £60,000 a year.
But for pots worth less than £10,000, you can withdraw this money in full without it affecting the MPAA.
If this is beneficial to you, it may be better to leave these small pots untouched.
- Find out more:how much will you need to retire?
5. Will I have to pay an exit penalty?
Some older pensions still apply exit charges.
This may be charged as either a percentage of your pension pot's value or a fixed amount. If you have a big pension and the exit fee is set as a percentage, you may end up paying more than with a fixed amount.
The size of an exit fee can vary from one provider to another, but some can charge as much as 10%.
You will need to weigh up these charges against the potential savings you will make from moving to a lower-cost scheme.
- Find out more:transferring your personal pension
6. Am I being scammed?
A transfer may sometimes be paused if a red flag is raised by your provider or trustees.
In 2021, the Department for Work and Pensions introduced a ‘red’ and ‘amber’ warning flag system designed to prevent scams. A red flag indicates a significant risk of a scam – for example, if you have been persuaded to make a transfer following a cold call or other unsolicited contact.
Of the 290,000 pension transfers in 2022 reviewed by the Financial Conduct Authority, 2,400 were given at least one amber flag. In 57% of cases, this was because overseas investments were included in the new pension, though some providers raised concerns that this was too broad a reason.
Some 300 transfers were given at least one red flag in 2022, most commonly because the individual did not provide the required information.
Never seek to transfer your funds to a company that you know little about.
What to expect in the future
There are a few schemes and proposals in the pipeline which could make consolidating your pension easier in future.
Pensions dashboards
The pensions dashboard initiative is designed to help you keep track of your pension pots by allowing you to see all your pensions in one place.
Dashboards will provide clear and simple information about your multiple pension savings, including your state pension, online.
But the programme has faced significant delays, with the deadline for schemes to connect to pensions dashboards now set for 31 October 2026.
- Find out more: do you know how to find lost pensions?
Multiple default consolidator
In the Autumn Statement, the Department for Work and Pensions confirmed it would go ahead with plans to tackle lost pension pots with a multiple default consolidator.
This means workplace pensions worth less than £1,000, which have had no active contributions for 12 months, will be automatically transferred to an authorised consolidator.
Proposals are due to be published in late 2024.
One pot for life
During the Autumn Statement the Chancellor also announced that the Government will explore the potential for reforms to allow people to choose their own pension scheme for automatic enrolment, rather than join their employer’s default arrangement.
Under current rules, UK companies are required to set up a pension scheme for employees. Unfortunately, this means many people will build up multiple pensions throughout their career, with a growing risk of those pots becoming ‘lost’.
The government has launched a 'call for evidence' on this new pension model that would allow people to have one 'pension pot for life'.
