05 Nov 2023

How to feel the joy (and avoid the dangers) of combining your pensions

Whether or not to begin combining your pensions becomes a popular dilemma when you hit your 40s and 50s. Sure, it sounds like a great idea to consolidate and simplify. But what are the potential risks? And if you do go ahead and merge your pension pots together, which one do you keep – or should you start a new one?

Don’t let tricky questions or risks put you off looking into this. Investing some time getting this part of your finances tidied up can bring a lot of relief and even joy.

Nowadays, workers in the mid to late career stage will often have multiple pension schemes, perhaps five or more. We’re all auto-enrolled into a new pension scheme every time we change employer, and switching jobs is happening more and more frequently.

So, over the years, it’s easy for things to get a bit messy and complicated. But with a little bit of time and effort, it’s not too hard to simplify and in all likelihood, save money too.


The benefits of combining your pensions

Don’t underestimate the joy of becoming more financially organised, especially if this has been niggling away at you for years. The key advantages to pension consolidation include:

  • Simplification: having your pension savings spread across less (or even just one) pot means less annual reports, paperwork and emails.
  • A clearer future: less pension pots means fewer annual projections and a clearer picture of how your retirement income is shaping up.
  • Lower costs: there’s a fair chance that some older pensions will have higher fees. Switching to lower cost options will save you money.
  • Better risk profile: your old employer pension schemes will probably be invested in a ‘default’ fund, likely balanced or medium risk. This may or may not suit you, so it’s a good opportunity to check that all your pension investments are matched with your attitude to risk.
  • Invest in what matters: most people have no idea where their pension money is invested. Often, it can be in industries that you don’t agree with. Doing work to combine your pensions is a great opportunity to re-invest in line with your values.


Beware of the pitfalls when transferring old pensions

Beware of pitfalls

Always ask your old pension scheme administrators if you would lose any guaranteed benefits by transferring out. Things to watch out for include:

  • Guaranteed annuity rates: these promise a guaranteed, lifelong income at retirement age. Sometimes, the rates can be really attractive. If you transfer out, you’ll lose the benefit forever, so there’s no going back.
  • Protected Tax Free Cash: pension rules generally allow you to take 25% of your pension fund as a tax free lump sum.  But some older schemes can have higher percentages built in, which you might find valuable. Transfer out, and you would lose that benefit.
  • Charges and Market Value Adjustments: there could be costs or penalties associated with transferring some pensions. Ask for a clear breakdown of any deductions that might be applied, if you were to transfer out.
  • Death benefits: it’s worth checking what your partner or dependents would receive, if you were to die as a member of the existing pension. You should compare this against the death benefits from any new arrangement.
  • Small and ‘trivial’ pots: for some people, holding onto one or more pension pots under £10,000 might have an advantage. That’s because you can cash in small pension pots without triggering a Lifetime Allowance check or a cut in your Annual Allowance.


Be very careful with defined benefit schemes

For most people, transferring out of a defined benefit, or final salary, scheme will not be in their best interests. It’s difficult to find guaranteed pension benefits now, outside of the Civil Service, NHS, Police, Fire and local authorities.

Be careful when combining your pensions

These types of arrangement offer a guaranteed income for life, based upon your earnings and length of service. All the risk is borne by the pension scheme itself, not by you.

In contrast, by transferring benefits into a personal pension, you take on all the risk. What you receive in retirement will depend upon the investment performance of your funds, how much you take out each year and how long you live.

If the Cash Equivalent Transfer Value of a defined benefit pension exceeds £30,000 you must receive regulated financial advice before transferring. This is a costly and complex piece of work and there are only limited circumstances that would make it a suitable option.


Tracking down lost pensions

Changing employers is so common now, that around 2.8 million pension pots have become ‘lost’. It usually happens when you forget to tell the administrators of old pension schemes that you have changed address.

When taking action on combining your pensions, it’s a great opportunity to look back at your full employment history. Consider if you have any years of work that are unaccounted for. It might just be that you own some of the £26.6 billion of ‘missing’ money throughout UK pension funds.

Read more about how to do this in my earlier blog here.


A new home for your pension funds

Once you’ve weighed up the pros and cons, and possibly found some old pensions you had forgotten about, it’s decision time. You could leave things as they are, but if you do go ahead with combining your pensions, where should the money end up?

For some, it will make sense to bring money into your current workplace pension. You’ll need to check that your scheme will accept payments in and it’s worth comparing the charges against your older schemes.

For others, perhaps a modern personal pension is better. Self Invested Personal Pensions (SIPPs) are easy to open with simple to use apps and websites. A good place to begin exploring options is the Boring Money website.


Summary: combining your pensions

Plenty of information is available online about combining your pensions. It’s easier than even to start a new pension and to transfer old ones, but it can still be daunting if you’re new to this.

As well as investing some time, it might be worth investing money to get help. For some, regulated financial advice can be well worth the money. Especially if you have complex arrangements, very high pension values or if you want advice on defined benefit transfers.

Regulated advice is also worth thinking about if you’re at the point of retirement and you need help working out how much you can afford to spend. Drawing down on your existing pension schemes in retirement can involve some tricky calculations and should be reviewed regularly.

For others, financial coaching could be an option to help you understand what you’re aiming for and to make sense of your options. You’ll become empowered to make your own decisions without being sold a product.

If you’d like to understand more about the right type of help for you, book a 30 minute chat. Or subscribe to my newsletter for weekly thoughts about money and life planning.