Should you combine your pensions?

Over the years you may have collected a variety of pension schemes, especially if you have had several jobs. For those who dislike the clutter of a mixture of pensions, consolidating (meaning to combine) many types of pension scheme into one modern pension can be a relatively straightforward exercise.

In particular, a “defined contribution” scheme, such as a personal pension, can usually be moved to another, similar scheme easily, making tidying up these pensions simple. However, there can be significant pitfalls too. Notably, “defined benefit” schemes require regulated advice before transferring that usually recommends they are best left untouched – although there can be exceptions. Defined benefit schemes are where the amount of pension income you are paid is based on how many years you’ve worked for your employer and the salary you have earned.

Benefits of combining pensions

There are several reasons why people decide to combine all of their pensions or just a select few.

1. Making life easier

Having fewer pension schemes can simplify your financial affairs. It means less paperwork and administration, plus it’s easier to keep track of what you have and where it is invested.

2. Wider investment choice

Some pensions have limited investment options and, if you are an active investor that could benefit from a broad choice, a SIPP (Self Invested Personal Pension) may give access to a wider range of investments. Find out more about how a SIPP works here.

3. Lower charges

Some older-style pension schemes may have uncompetitive charges by today’s standards; you may be able to save money by transferring to a lower cost scheme.

4. More options for taking benefits

If you want the greatest flexibility in terms of drawing your pension including income drawdown then you may need to move your pension pots to a personal pension or SIPP. Pension drawdown is where you keep your fund invested and take an income from it rather than converting it to a guaranteed level of income through an annuity. It’s riskier because your money could run out, but there may be more attractive death benefits. Wealthy investors who don’t need income may elect to take no benefits at all from their pension, keeping it invested with the aim of passing on as much as possible to their family.

When should you not combine pensions?

Pension consolidation also comes with some risks to your retirement savings, depending on the type of scheme you have been paying into. You should think twice about combining your pension if the following points apply to you.

1. Losing the security of defined benefits

Defined benefit schemes such as final salary schemes have valuable promises attached to them. Essentially, you would be giving up a pension income that will be payable for the rest of your life for one that might run out. You must always take regulated financial advice if you are considering this sort of transfer.

2. Missing out on valuable benefits

Other pensions may have bonuses, guarantees or even life cover attached to them that would be lost when transferring them to another scheme. This is particularly the case with older schemes.

3. Employer contributions

If you are currently contributing to a workplace pension your employer will be contributing too. Moving elsewhere may mean giving up this valuable boost to your pension savings.

4. Transfer penalties

Some pensions, particularly older ones, charge administration fees or exit charges if you transfer away. You should always check what these are before considering a transfer as they can be prohibitive.

To help with your retirement planning, we've put together a comprehensive guide. Check it out today and get expert tips on how to build a solid retirement plan for your future.

Guide to Saving for Retirement