How to combine pension pots to make investing cheaper and easier

Savers often accumulate a series of pension pots during their working lives, but many never bother to combine their pensions.

With a combination of different employers, several pension pots can be built up and saved over the years for different personal pensions.

But the more different pensions you have, the more likely you are to lose track of them. And a clearing up exercise can reduce costs and paperwork and open up new options for retirement investing.

But pooling pensions is not always advisable because you risk losing valuable benefits. We look at the pitfalls to avoid and what you need to know about combining pension pots.

Why do savers receive so many pensions?

Auto-enrollment is very successful at getting people to sign up for retirement, but a system built on inertia means that many employees are likely to end up with a collection of pots they barely know anything about.

The number of orphan’s pensions has skyrocketed in recent years and the financial industry launched an initiative last year to help people find them – here’s what to do if one of your old pensions is missing.

Retirement consolidation companies have sprung up to help people manage all or most of their retirements in one place, and this can be both cheaper and more convenient.

However, many people still tend to stick to traditional salary-linked pensions, known in the industry as defined benefit plans, because of the benefit of guaranteed income until you die.

There is usually a stronger case for merging new style defined contribution pensions, although there may also be good reasons to keep them where they are: tax benefits and valuable guarantees at the top, and exit fees at the bottom.

What you should pay attention to when merging your pensions

1. Guaranteed annuity rates

If these are high, it may be worth sticking with an old pension and buying an annuity from it. Rates on this have been improving lately, even without a guarantee, as interest rates have risen.

You must get paid financial advice to move a pension worth £30,000 plus a GAR.

2. Guaranteed fund returns

These are rare, but it’s worth checking the fine print to see if they’ll benefit you.

3. Larger lump sums

With some older company pensions you can withdraw a tax-free amount of more than the usual 25 percent.

If you have one of these and want to withdraw a large amount in retirement – for home improvements, paying off the mortgage and so on – you may want to stay put. But if you don’t do that and the conditions of the old pension are not so good, you can consider whether moving is more advantageous.

4. High exit penalties

Most standard work pension funds today are low cost trackers. If you have a precious old pension with limited investment choices, you can weigh the benefits of moving despite penalties.

But exit fees are capped at 1 percent after you reach age 55, so it may be worth waiting.

5. Current employer contributions

You get free employer contributions in your current work arrangement and you don’t want to lose that money that comes into your pot.

6. Protected Retirement Ages

It depends on the plan rules, so check them, but you may not want to miss out on the chance of accessing a pension at age 50, especially if you have several others taking effect later.

7. Final salary pensions

Outside the public sector, generous final salary pensions that pay guaranteed income until you die, plus valuable death benefits to surviving spouses, have all but been wiped out.

Many savers in recent years have also voluntarily moved away from these traditionally safe “gold plated” pensions, tempted by huge transfer value offers, greater potential investment growth and the legacy benefits of defined contribution pensions – you’re not limited to bequeathing only to a spouse.

You are required to get paid financial advice if your transfer value is over £30,000, which is long-term protection against making mistakes that you can’t reverse later.