Should You Consolidate Your Pensions? Pros, Cons & Tax Considerations

Did you know that over £31 billion of lost pension pots are unclaimed in the UK? If you’ve had several jobs over the years, you’re likely to have accumulated multiple pension pots, with each being tied to a different employer or provider. But if you’re unaware about which pensions you hold and where they’re kept, you could end up losing out on thousands of pounds of hard-earned money.

One question that people often ask us is ‘should I consolidate my pensions?’ Pension consolidation can help make planning for retirement much simpler; but as with most financial decisions, it’s not always that straightforward. There are many pros and cons to consider, along with important tax implications that could impact your long-term plans. We break down everything you need to know about combining your pension pots below…

What is Pension Consolidation?

Pension consolidation is the process of transferring multiple pensions into a single scheme. It might involve moving your old defined contribution (DC) pensions into a modern personal pension or SIPP (Self-Invested Personal Pension). Or, you might simply bring together various workplace schemes from your former employers. Regardless of which type of pension you’re thinking of moving, it’s important that you’re aware of the pros and cons of doing so before making a firm decision.

The Pros of Combining Your Pension Pots

Makes Retirement Planning Simpler

Keeping track of five or six pension pots from different providers can make planning for retirement very difficult. When you consolidate your pension pots, you gain a clearer picture of your total pension savings and how they’re invested.

Easier to Manage in Retirement

As well as streamlining your retirement planning, having one pension pot to draw income from makes decumulation much more straightforward. It can also make it easier for your loved ones to understand your financial affairs in the event of your passing.  

Cut Down on Costs 

Some older pension schemes have high annual charges or complex fee structures. Transferring your pension into a modern scheme can help to reduce these costs, which has a direct impact on your retirement income.

More Control Over Your Investments

Newer pension platforms often offer a broader range of investment options to choose from. For example, your provider may allow you to choose between ethical funds, passive trackers, or actively managed portfolios, giving you more say over how your pension is invested.

Flexible Death Benefits

Death benefits on some older pension schemes may be limited to a lump sum or annuity. Transferring a pension to a scheme with modern flexible death benefits (such as nominee drawdown) may allow your beneficiaries to have more flexibility over how they can access your pension funds in the event of your death. This can potentially provide estate planning advantages, more tax efficiency and greater control for your loved ones.

When Should You Think Twice About Pension Consolidation?

Despite its many advantages, combining your pensions isn’t always the best option, and there are times when keeping your pots separate might be more beneficial. You should think carefully before consolidating the following types of pensions:

Pensions with Valuable Guarantees

Some older pensions come with generous features, such as guaranteed annuity rates (GARs), investment options with guaranteed growth rates, scheme specific tax free cash (which may be greater than 25%), or protected early access ages. If you transfer money out of these pots, you’ll usually lose access to these benefits.

Defined Benefit Pensions

Defined benefit (DB) pension schemes give you a guaranteed income for life. They’re often linked to your final salary and are automatically adjusted for inflation. If your pension pot is valued over £30,000, then you’ll need to seek specialist financial advice before transferring your money out of this type of scheme.

Pensions with High Exit Fees

Some older pension schemes charge you a fee for transferring your money out – often a percentage fee of the total pot value. It’s important that you weigh up this initial cost against the long-term benefits before making a decision.  

Tax Implications of Pension Transfers

Most transfers between registered UK pension schemes are not taxable, but there are a few exceptions that you should be aware of:

The Money Purchase Annual Allowance (MPAA) 

If you’ve already accessed any of your pensions (beyond your 25% tax-free lump sum allowance), then you may have triggered the MPAA. This reduces the amount that you can contribute to your pensions from £60,000 to £10,000 per year. If you’re consolidating your pots after triggering the MPAA, then your future pension contributions may be restricted.

Transitional Protection Consolidations

Although the standard Lifetime Allowance (LTA) was abolished in April 2024, some transitional protections still remain. If you had Fixed or Individual Protections in place, then you could risk losing them if your pensions are transferred incorrectly, which could affect how your tax-free lump sums are calculated. 

Overseas Transfers

If you’re thinking about moving your pension abroad, for example to a QROPS (Qualifying Recognised Overseas Pension Scheme), then you might be subject to a 25% overseas transfer charge unless certain conditions are met. You should always consult a qualified financial adviser before transferring to an overseas pension scheme. 

Is Pension Consolidation Right for You?

Whether or not pension consolidation is right for you all depends on your personal circumstances and the specific details of your pensions.  

You might benefit from combining your pensions if:

• You have several small defined contribution pots from previous jobs
• Your pensions are hard to keep track of or manage
• You’re paying high annual fees for multiple pension pots
• You want greater control over your investments
• Your schemes have limited retirement options or death benefits

However, you should think carefully and seek advice if:

• You have any pensions with safeguarded benefits, valuable guarantees, or scheme protections
• Your pension is part of a defined benefit scheme
• The transfer would trigger a loss of protection or incur high exit fees

Seek Expert Pension Advice from Piercefield Oliver

Need help deciding whether to consolidate your pensions? At Piercefield Oliver, we provide clear, independent pension advice that allows you to feel confident about your transition to retirement. We can review your existing pensions and assess whether consolidation is right for you, before creating a detailed retirement plan that is tailored to your exact needs.

We can also help you:

• Track down lost or forgotten pensions
• Understand and preserve any valuable scheme benefits
• Compare fees, investment choices, and performance across your pots
• Make sense of the complex tax rules around pension contributions and withdrawals

Book your free consultation with one of our pension experts today and get ready to start planning for your retirement.