How to consolidate your pensions and have a more comfortable retirement

Each new job comes with a new pension, but condensing them means you have a bigger pot – and won’t lose track of any.

The days of a ‘job for life’ are over, and most people will collect several pensions over their careers. Every time you change jobs, your new employer has to enrol you into a new fund or scheme. 

As the pension from your old employer will not automatically follow you to your next job, it is easy to build up many relatively small pots of cash.

People can end up with as many as 11 different pension pots, according to the Department for Work and Pensions (DWP). 

But condensing all these pensions into one can have significant advantages, not least that your overall retirement pot will be larger.

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Benefits of consolidating

It is important to make sure you are on track to have enough to live on in retirement, but if your money is scattered in several pension pots it can be very difficult to know how much you have saved in total.

Keeping track of several pensions and providers can also make it tricky to know how much to put in a pension in order to reach your goals.

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Each pension fund will have its own fees attached, and many have an annual charge, even if you never touch your investments.

Having just one pension fund can reduce charges for savers and maximise the potential to grow the pot over time. Charges in small pots can wipe out gains over the long term, even to zero in extreme cases. 

Charges are also likely to be higher in older pension funds, particularly individual schemes taken out before 2001. These could be charging 0.5% per year more in fees than newer ones.

Rebecca O’Connor, head of pensions and savings at interactive investor, says the savings will depend on the number of pensions and how much each provider charges. 

She said: "By moving from an older pension fund to a platform, the management charge can be much lower, which can have a significant positive impact on your returns overall. 

“A high management charge might be 1.5% and a more reasonable one might be more like 0.6%. The charges on old schemes are probably higher than average, particularly if they are with old life companies.”

The administration fees will likely be lower too because you pay just one set of them thanks to having just one provider.

Are there downsides?

There can be some downsides to consolidating, and it is important to be aware of them before making decisions. 

Firstly, it may be costly to transfer some pots, particularly older ones. Modern pension policies can generally be merged without penalty, but savers can face exit charges if they want to take money out of older policies. The general rule is the newer the pension, the lower the charges. 

Exit fees can have a big impact when transferring small pension pots, and erode their value. They are quite rare, but when they do occur, they can be large. Over-55s have benefitted from the Financial Conduct Authority (FCA) capping exit fees at 1% from March 2017.

Be cautious about transferring some types of pension, especially if it is a defined benefit (final salary) one. Generally, it is a good idea to hold on to these pots, as they pay out a guaranteed amount of money in retirement. This is unlike defined contribution pensions, which depend on investment returns and level of contributions when paying out.

Some older pensions have valuable benefits such as a guaranteed annuity rate option. This is a promise that the pot could be turned into a guaranteed income in retirement.

It is important to note that cashing in a pension can count against your £1.073 million lifetime contribution allowance. This is the limit on the amount of pension benefit that can be drawn from pension schemes without triggering an extra tax charge.

Savers can cash in up to three pots worth up to £10,000 each without using up some of their lifetime allowance. 

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If a person has three of these small pots and a big pension somewhere else, they could take each of the small pots as cash. Then their whole lifetime allowance would be left to the main pension. 

But if you consolidate all three into one pot, or merge them into your big pension, then everything counts and would mean £30,000 of your lifetime allowance has been used up. 

Beware of the 55% tax charge if you exceed the lifetime allowance.

Also, it is vital to check that the provider is covered by the Financial Services Compensation Scheme, which protects you if your pension provider goes bust. Remember that there is a £85,000 limit on the compensation that you can get from any one provider.

"When consolidating your pensions, make sure that you're not overexposed to a single financial institution, which would limit the compensation you would get,” says LCP partner and former pensions minister Steve Webb.

How do I consolidate my pots?

One option is to consolidate your old pensions into your current employer’s workplace pension scheme. You can also consolidate them into a pension fund such as a self-invested personal pension (SIPP) - or use a pension consolidator platform. 

"With a SIPP, you have a lot more freedom and control of what you're investing in than rather than sticking with one pension provider,” says O’Connor. 

“A lot of workplace providers offer different options based on your risk profile, but some may only offer two options, which is not a huge amount of choice."

With SIPPs, there are a number of options ranging from buying a simple all-in-one portfolio to picking your own funds and stocks. 

• Find out more about interactive investor SIPP and pensions here

But LCP’s Webb says the advantage of consolidating pots into your current workplace pension is that quite often the charges will be very favourable. This is because employers will have negotiated a deal on charges with the pension provider.

If you decide to consolidate your pensions, it is worth doing it sooner rather than later. Over time, pension providers can be bought by other companies, or become harder to trace. The amount of ‘lost’ or ‘forgotten’ pension pots is estimated to be a whopping £20 billion, according to The Pension Tracing Service.

How to track down your pension pots

•    Ask your pension provider (if you know the name)
•    Ask your former employers if they had a workplace pension fund
•    The Pension Tracing Service: This is a free service which searches a database of more than 200,000 workplace and personal pension schemes.