Is Combining My Pensions Right for Me?

If you’ve changed jobs a few times or set up different pensions over the years, you might now have several pension pots scattered across various providers. It’s a common situation, and you may be wondering whether it’s worth combining these pensions into one.

Bringing everything together can seem like a smart move – fewer accounts, less paperwork, and potentially better value. But as with most financial decisions, it’s not always black and white. The best approach depends on the type of pensions you hold and your future plans for retirement.

In this blog, we’ll focus on Defined Contribution (DC) pensions, such as workplace schemes or personal pensions, and explore the pros and cons of combining them. We’ll also touch on Defined Benefit (DB) pensions, sometimes called final salary schemes, which require a different approach entirely.

Please note: This article is for general information only and does not constitute financial advice. It is focused on Defined Contribution pensions. I do not provide advice on transferring Defined Benefit pensions.

First, Know What Type of Pension You Have

Before doing anything, it’s important to understand what type of pensions you hold:

• Defined Contribution (DC): These are built up from contributions you and/or your employer make, and the value depends on how much you contribute and the performance of the underlying investments. Examples include workplace pensions, personal pensions or SIPPs.
• Defined Benefit (DB): These offer a guaranteed income in retirement, usually based on your salary and years of service. Examples include final salary or career average revalued earnings (CARE) schemes.

Considering Combining Your Pensions: Defined Contribution Schemes

If your pensions are all DC type, combining them could potentially simplify your retirement planning. But it might not suit everyone, and there are some important factors to weigh up.

Potential Benefits

1. Simpler Administration

Managing multiple pension pots can be confusing. You may not remember where all your pensions are, and old schemes may not have your current contact details. That means you might miss important updates or even lose track of a pot altogether.

Bringing pensions together in one place can reduce paperwork, improve visibility, and ensure you’re receiving regular statements and notifications.

Keeping your personal details, especially your address, email, and nominated beneficiaries, up to date is essential. It’s a good idea to keep a written record of all your pensions, where they are, and who to contact. Many people find it useful to use a document like “What I Own and Where I Keep It”, which helps you stay organised and ensures your loved ones know where everything is too.

2. Potential Cost Savings

Some older pension schemes have higher charges. A modern pension may offer lower fees, which could result in more of your money staying invested.

3. Greater Investment Choice

Newer pensions – especially Self-Invested Personal Pensions (SIPPs) – typically offer a wider range of investment options, including access to ESG (Environmental, Social, and Governance) or sustainable funds.

In contrast, many workplace pensions automatically invest your money in a default fund, which may not reflect your personal investment preferences, risk appetite, or retirement timeline. You might have limited flexibility to switch funds, or the available options may not align with your goals.

For instance, someone planning to retire in 10 years might benefit from a more cautious investment strategy than someone with a 30-year horizon. Having more choice means you can better tailor your pension investments to suit your individual needs and time frame.

5. Flexible Access at Retirement

Consolidating into a scheme that supports flexi-access drawdown can make it easier to tailor your income in retirement, allowing you to take money out in stages, rather than buying an annuity or withdrawing the whole pot at once.

However, it’s worth noting that some older or workplace pension schemes don’t offer flexi-access drawdown at all. If that’s the case, you may still need to transfer your pension later to another provider that can offer the flexibility you need, which could involve extra time and decisions at a point when you just want to access your money smoothly.

By combining your pensions in advance into a drawdown-ready scheme, you may be able to simplify the process and have more control over how and when you access your retirement income.

5. Better Digital Tools and Visibility

Modern pensions often come with online dashboards, planning tools, and better reporting – helpful if you like to stay on top of things.

Important Considerations

1. Exit or Transfer Charges & Out-of-Market Risk

Some pensions may apply exit charges if you transfer out before a certain age or within a fixed term. These fees can vary in size and potentially reduce the overall value of your pension pot. Even small charges can add up when transferring multiple pots, so it’s important to check the details with each provider.

Additionally, there’s the risk of your pension being out of the market during the transfer process. Some providers take longer than others to process transfers, especially if older systems or manual processes are involved. During this time, your funds may be sold and held as cash, meaning you could miss out on market growth or investment returns. While this could sometimes work in your favour (for instance, during a market dip), it does introduce a level of timing uncertainty that’s worth factoring into your decision.

2. Loss of Guarantees

Many older pension schemes come with valuable features that are no longer commonly offered. These might include:

• Guaranteed Annuity Rates (GARs): These provide a fixed income for life at a rate often significantly higher than those available on the open market today.
• Guaranteed Minimum Pension (GMP): Common in older workplace schemes, especially those from the 1980s and 1990s, this ensures a minimum level of income in retirement.

If you transfer a pension that includes one of these features, you will likely lose that guarantee. These benefits can be extremely valuable, especially in a low-interest-rate environment, and once given up, they can’t be reinstated. It’s important to weigh the value of these guarantees against the potential advantages of consolidating.

3. Protected Tax-Free Cash

While most pensions allow you to take up to 25% of your pot tax-free, some older schemes offer a higher protected tax-free lump sum. This might be based on a percentage of your salary or have been fixed at the time of contribution under previous pension rules. 

Transferring these pensions into a modern scheme can result in the loss of this extra tax-free cash entitlement. Even if the difference seems small now, it could make a significant impact on the lump sum you receive at retirement. If you think one of your pensions might have this protection, it’s essential to get confirmation from the provider before making any changes.

4. Investment Risk Differences

Each pension scheme will have its own investment approach, fund choices, and levels of risk. Transferring your money means your investments will also change, either by default or through new selections you or your adviser make.

Depending on the scheme you move into, the new fund might expose you to higher or lower risk than you’re comfortable with or expect. This could affect your future returns or how smooth your investment journey is over time. It’s important to check the investment options available in the receiving scheme and ensure they match your risk tolerance, investment goals, and retirement timeline. Being aligned with the right investment strategy is just as important as simplifying administration.

What About Defined Benefit (DB) Pensions?

Defined Benefit pensions work differently. Rather than being based on a pot of money, they promise a guaranteed income for life, often increasing in line with inflation.

Transferring a DB pension means giving up that guaranteed income in exchange for a cash value that you would invest in a DC pension. While that cash value might seem appealing, especially if large, it’s vital to understand what you’re giving up.

Key Risks of Transferring Out of a DB Scheme

• Loss of Guaranteed Income for Life and potential Death Benefit
• Exposure to Investment Risk
• Risk of Running Out of Money
• Potentially Poorer Outcomes in Retirement

Because of the seriousness of these risks, transferring out of a DB pension is rarely in a person’s best interests and is regulated very tightly by the Financial Conduct Authority (FCA).

I do not offer advice on transferring Defined Benefit pensions. If you are considering this, you will need to speak to a regulated pension transfer specialist.

Final Thoughts

Combining pensions can help bring clarity, cut down on admin, and possibly reduce costs, especially if you’re dealing with several Defined Contribution pots. But it’s not always the right move. Some pensions come with valuable benefits that would be lost on transfer.

The key is to gather the facts about what you currently have, including charges, guarantees, and access options, before making any decisions.

If you’re unsure, independent financial advice can help you understand your options and what’s most suitable for your goals and circumstances.

This blog is intended for general information purposes only and does not constitute financial advice. Always speak to a qualified adviser if you’re considering making changes to your pension.