Should I combine my pension pots? Why it can pay off - and traps to avoid
Savers often collect a number of pension pots during their working lives as they move jobs but many never bother combining them.
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.
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 attached to employer schemes - 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 has launched an initiative 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.
Experts say most people should still be inclined to hang on to traditional salary-linked pensions - known in industry jargon as defined benefit. These have the advantage of providing a guaranteed income until you die, which it is the employer pension scheme's responsibility to pay.
Defined benefit pension income is built up for each year worked for a company and based on either final salary or career average earnings.
Hardly any private companies still offer defined benefit schemes but they are still commonplace in the public sector. Instead, most private firms have defined contribution schemes where the employer and employee pay into an investment pot.
There is usually a stronger case to merge these new-style defined contribution pensions. But even here there can be good reasons to keep them where they are, such as tax advantages and valuable guarantees, or exit penalties.
For example, some older workplace pensions may offer minimum income guarantees or lock in the ability to withdraw funds earlier than the standard age of 55, soon to rise to 57.
What to consider before merging your pensions
1. Fees on old and new pension schemes
Higher charges can make a serious dent in your future returns.
2. Where are your pensions invested
Past returns are not a guide to the future, but you should investigate where your money will be held. Read our guide to carrying out a healthcheck on investments.
3. A private provider versus your work scheme
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, your current workplace scheme might have negotiated lower fees and rolling up your older pensions there might be even handier if you want to cut down on admin.
4. 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.
5. Guaranteed fund returns
These are rare but it is worth checking the small print to see if you benefit.
6. 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.
7. 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.
8. 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 by opting or transferring out.
9. 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.
Meanwhile, the minimum age you can start accessing private pensions will rise from 55 to 57 overnight on 6 April 2028.
It's important to find out the age rules on your work and other personal pensions, because some people will continue to be able to access their funds at 55 depending on what they say.
But you could accidentally forfeit this right if you move a pension to a scheme without this benefit.
Anyone who wants to move their pensions should check the schemes' rules before doing so, in case you switch from one which still allows withdrawals from age 55 to one which will bar this from April 2028, and you want to retain this advantage.
In some cases, after a transfer a new scheme will allow you to keep the old age 55 option on the funds you have moved, but your future contributions will be subject to the age 57 rule.
So, if you are in a scheme with a protected pension age and then later transfer, you could end up in your new scheme with two different minimum pension ages on separate segments of your savings.
10. 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 - but note that pensions will become part of your estate for inheritance tax purposes from April 2027 onwards.
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.
