Consolidate your pensions

If you've got more than one pension, we tell you when you could be better off putting them into one, and how to go about it.

Often the best reason to consolidate your pensions is to lower costs, as this is the single factor that’s most likely to leave you with a bigger retirement pot.

Saving just one percentage point per year in costs could increase your final pot by many thousands of pounds. 

Some people consolidate to get more investment choice or for the convenience of having one account to manage. You might also want to consolidate because it could be easier to convert very small pots totalling, say, £10,000 or more into retirement benefits at a fairer price. 

You must weigh up these potential benefits against the costs of switching and against your existing pensions schemes, which may be generous, or already cheap. 

This article gives you just the very basics of who might be suited for consolidation and how you might go about doing so. 

1. Find your pensions

If you can't find the details of all your pensions and old employers can't help, the Department of Work and Pension has a pensions tracing service for personal and company pensions. 

2. When consolidating is costly

Some pensions are either too good to give up or the costs of switching from them are prohibitive. These typically include: 

- Defined-benefit schemes (such as a final-salary or career-average scheme).

- Pensions with guaranteed annuities (which might include with-profits pensions).

- Pensions with exit penalties or “market value reductions”.

- Guaranteed minimum pensions or guaranteed investment returns.

- Pensions allowing a tax-free lump sum higher than 25%.

- Death benefits and other benefits could be of significant worth, depending on your circumstances. 

Do your research very carefully before switching away from such pensions – even if your employer or others are encouraging you to do so! 

3. Compare old with new

Now, compare your existing pensions with any pension you're considering moving to. You may need help with the sums, because comparing costs isn’t straight forward. 

Firstly, compare the separate costs of the investment funds you can choose from in each of the pensions. These include the initial cost of each contribution you make (which could be between 0 and 5%) as well as the annual commission charges (between 0.15% and 3%). 

Then you need to compare any charges on the pensions themselves, since pensions are a kind of “wrapper” for your investments that can come with an additional layer of charges. Older pensions and funds often have much higher charges. 

Also compare pensions to see which holds the investments you want. Choosing investments is a big subject by itself, so I can't cover it here but, generally speaking, people investing regularly in cheap index trackers can expect to do better than 80% of other investors. 

Many in the industry will want you to focus your attention on comparing fund performance, but costs are more important. A small decrease in costs can increase your gains in the long run by far more than you'd think and it usually does.

4. Moving is never free

There are more costs to consider. Moving money around is never free; even if there are no exit penalties specified on your existing pensions, there are costs in transferring investments from one place to another, and you might have to pay more initial charges. 

Plus, if you get financial advice to help you decide, you also must consider the cost of it, and the lost investment returns for not putting that cost into your pension. Advice is more likely to be worth the cost if you have a larger pot, if you shop around for your advice, and if you decide to pay an up-front fee instead of commission, and if you don't sign up to expensive on-going advice fees unless that is really necessary. 

Sometimes you aren't allowed to transfer out of occupational pensions into some others without getting financial advice, but you'll be told that in good time when you try it. 

If your pots are small

If you're considering consolidating because your pots are small, it might be worth waiting. Steve Webb, the pensions minister, has said it's a “big priority” to make consolidating small pots, and getting the benefits, easier and cheaper. That said, who knows if it'll happen, or when. 

Those of you with total pots of less than £18,000 can take the whole lot in cash, but there are strict timelines for you to do so, so check it out now if you're approaching retirement. 

Don't know where to consolidate?

If you're looking for a brand new personal pension to consolidate into, “stakeholder pensions” can be good, but look for ones charging 1% or less per year with no initial charges. You should consider getting an Aviva or Standard Life pension through Cavendish Online, which for a one-off fee of £35 will reduce the cost of several index trackers to nearly 0.5%. Fantastic. 

If you have large pots or make big contributions, and you want more control, you could look to SIPPs with Alliance Trust (for the cheapest index trackers from Vanguard), Fidelity (for a larger choice of funds and index trackers) and to SIPPDeal (for picking individual shares). 

A final check

Whether you get financial advice or not, as a last check before going ahead, you could post your situation on lovemoney.com's Q&A or in an online financial discussion board. Perhaps someone can improve on your plan. 

How to consolidate

If you don't use an IFA, you'll need to get in touch with your existing providers for discharge documents and send those with your application form to the new provider, which should help you if necessary. It could take one or two months in total. 

If you had any more questions about pensions or retirement planning in general, have a read of our comprehensive guide to pensions.