Should I Consolidate My Pensions? Pros and Cons Explained. (combining them)

4-minute read
Last updated: 25/10/2024

Are you considering whether to consolidate your pensions? Before you make a decision, it's essential to weigh both the potential advantages and risks.

Many of us accumulate several pension pots over the course of our working life. These might include defined benefit pensions, which promise a guaranteed income in retirement, or defined contribution pensions, where your retirement savings are based on how much you and your employer have contributed, along with any investment returns.

But is consolidating your pensions the right move for you?

It’s common to wonder when reviewing multiple pension statements or dealing with the administration burden, such as updating addresses for each scheme. In this article, we’ll outline the pros and cons to help you make an informed decision.

Summary

  • Consolidating your pensions may open up better investment opportunities.

  • It could help you avoid high fees, especially in older plans.

  • Having fewer pension pots can simplify your finances.

  • For defined benefit schemes, consolidation may not be beneficial.

The Pros of Consolidating Your Pensions

  1. Improved Investment Performance
    Some pension plans offer superior investment options compared to others. By consolidating your pensions, you could take advantage of these better-performing funds and phase out underperforming ones.

    Investment performance is a key factor in the growth of your pension pot. Older pensions may restrict you to managed funds that are either poorly managed or not actively monitored. Newer pension plans may offer a broader range of investment funds, allowing for better control and potentially improved performance.

  2. Lower Fees
    Pension plan charges can significantly impact your overall retirement savings. Older pensions, in particular, tend to have higher fees. Consolidating your pensions can help you eliminate these higher-cost plans, although it’s essential to assess the fee structures carefully.

  3. Simplified Administration
    Managing fewer pension plans makes your financial life easier. Consolidating could reduce paperwork, save time when updating personal information like addresses, and make it simpler to convert your pension into income when you retire.

The Cons of Consolidating Your Pensions

  1. Defined Benefit Pension Plans
    If you have a defined benefit (or final salary) pension, transferring it into a defined contribution plan could be risky. You’d be taking on the investment risk yourself, which could mean losing valuable benefits, such as a guaranteed income for life or a larger lump sum.

    There are also additional features, such as higher guaranteed annuity rates, that could be lost if you move your pension. However, if you’re concerned about the stability of your employer's pension scheme, consolidating might give you peace of mind by giving you more control.

  2. Loss of Additional Benefits
    Some pension plans offer extra benefits, such as a higher tax-free lump sum (beyond the standard 25%) or guaranteed annuity rates. These benefits would be forfeited if you transfer the pension into another scheme, so it’s crucial to understand what you might be giving up.

  3. Potential Exit Costs
    Some pension funds, such as with-profits schemes, might apply penalties like a market value reduction if you exit early. While these penalties can be minor, they are still something to factor in when considering consolidation.

  4. Costs Involved in Consolidating
    Seeking professional advice on pension consolidation is a wise move, as a financial adviser can ensure all factors are thoroughly evaluated. However, this comes with a cost, and it’s important to weigh up whether the benefits of consolidation outweigh the expense of advice and any additional administrative tasks involved, such as retrieving policy numbers.

Is Pension Consolidation Right for You?

Consolidating your pensions can be a complex decision with multiple considerations. While it offers potential benefits like better investment options and lower fees, there are also risks, especially with defined benefit pensions or exit penalties.

To ensure you make the right decision, it’s important to seek professional advice. A qualified adviser can analyse your pensions, weigh the pros and cons, and help you decide whether consolidating is the best choice for your financial future.

Need help? At pension Pathfinder, we introduce you to experts who are here to guide you through the process and ensure you make the right decision for your retirement. Contact us today to learn more.

By Lauren Dawson
Freelance Writer for the Financial Industry

Lauren Dawson is a dedicated law student with a passion for financial journalism. Alongside her legal studies, she works as a freelance journalist, specialising in financial topics and contributing to various industry websites. Her unique blend of legal insight and financial expertise provides a fresh perspective on complex financial matters.