Pension Consolidation
Find out about combining pensions and easily understand consolidation schemes in minutes to enhance your retirement savings.
Simplify management by combining multiple pensions
Avoid paying multiple sets of management fees
View all your pension funds in one place
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What is pension consolidation?
Pension consolidation is the process of combining multiple pension pots into a single pension scheme.
According to the Department for Work and Pensions, the average person changes jobs 11 times during their career.¹ This can lead to multiple pension pots from various employers and providers, leaving you with a retirement fund that's hard to manage and optimise.
If you consolidate your pensions into one chosen scheme, you could simplify your pension management, potentially reduce fees, and gain better control over your investments.
Key Reasons for Pension Consolidation
Before making your decision, explore the reasons pension holders typically choose to consolidate:
Simpler Admin
Consolidation reduces paperwork and makes it easier to track your pension performance. Instead of dealing with various providers and reviewing multiple statements, you'll have a single point of contact and a comprehensive overview of your retirement savings.
Combine my pensionsCost Efficiency
Multiple pension schemes often means multiple sets of fees and charges. If you consolidate pensions, you might find you can reduce your overall costs. According to the Department for Work and Pensions, an average earner could have £3,000 more in their pension pot as a result of moving into a large master trust provider due to lower costs. If costs were to further lower due to increase scale and efficiency, this may lead to further gains.²
Combine my pensionsInvestment Performance
Older pension schemes may have limited investment options and strategies. Modern pension providers often offer a broader range of investments to choose from, better performance tracking, and digital access. This could lead to better returns and investment strategies for your retirement goals.
Combine my pensionsVisibility and Control
A consolidated pension could give you a clearer view of your total pension savings and more control over your investment choices. This extra oversight could help you make more informed decisions about your retirement and adjust your strategy as needed.
Combine my pensionsDeath Benefits Options
Modern pension schemes often offer more flexible death benefits and nomination options. Consolidating into a new scheme could provide more protection for your loved ones and clearer estate planning. Newer schemes typically offer more options for how your pension is passed on.
Combine my pensionsNew Features
Many newer pension schemes offer advanced features like mobile apps, regular performance updates, and flexible withdrawal options at retirement. Moneyhub chief commercial officer, Dan Scholey, said that 68% of users polled had improved their understanding of their retirement income by using an app.³
Combine my pensions
Defined Contribution vs. Defined Benefit Pensions
You'll find DC pensions more flexible than DB schemes when it comes to consolidation:
Defined Contribution Pensions
Most defined contribution (DC) schemes are suitable for consolidation. You're more in control of your contributions and investments with DC, making them a more flexible option for transfer.
DC schemes generally offer straightforward transfer processes and can be combined to simplify management and potentially reduce fees.
Defined Benefit Pensions
Defined benefit (DB) schemes are more employer or trustee-controlled and the benefits are standardised for all members. DB pensions require extensive professional evaluation before transferring, partly because their guaranteed benefits are often more valuable than the transfer values suggest.
Once you transfer out of a final salary pension (DB) the investment decisions become yours and the move can't be reversed.
Pension Consolidation Pros and Cons
Advantages
- Simpler Management: Keeping track of your retirement savings could be significantly easier when working with a single pension provider.
- Cost Effectiveness: Consolidating multiple pensions could lead to reduced overall management fees and charges across your various pots.
- More Oversight: Having all your pensions in one place provides a clearer view of your total retirement savings and investment performance.
- Enhanced Features: Modern pension schemes often provide smoother online access, better fund choices, and more flexible retirement options.
- Improved Strategy: A consolidated pension could allow for a more focused and coherent approach to your investment strategy.
Disadvantages
- Benefits Loss: Some older pension schemes may have valuable guarantees or protections that might be lost when you transfer them.
- Transfer Fees: Moving your pension savings might incur exit fees from your current providers or setup charges with the new scheme.
- Market Risk: Transferring large sums of money from a pension means being out of the market temporarily, which could affect your returns.
- Complex Decisions: Evaluating multiple pension schemes and their features can be hard work in retirement. It's time-consuming and may also require professional advice.
- Extra Admin: The initial consolidation process takes time to set up and requires careful coordination between providers.
When is the right time to consolidate?
The best time to consider pension consolidation is typically when you have multiple pension pots that aren't serving you as well as they could be. This might be after changing jobs several times, when you notice high fees across different schemes, or when you're approaching retirement and want more control over your retirement income.
It's crucial to review your pensions first. In 43% of cases (according to the FCA), clients are recommended not to transfer or convert their DB pensions, for example. You should look carefully at your existing benefits or guarantees to make sure it's right for you.⁴
Consolidation Fees, Charges, and Taxes
1. Exit Fees
Some pension providers charge fees when you transfer out of their scheme. These can range from fixed amounts to a percentage, typically between 1-5% of the transfer value.
The fee often depends on how long you've held the pension and its total value. Old pensions, particularly those started before 2001, tend to have higher exit fees. Some providers have tiered fee structures where the percentage decreases for larger transfer values.
Waiting for certain age milestones can sometimes reduce or eliminate these fees. Check your policy documents or contact your provider to understand these costs, as they can significantly impact the value of your transfer.
2. Initial Transfer Charges
Your new pension provider might charge setup or transfer-in fees, although many modern providers have eliminated these costs to attract more customers.
When these fees exist, they can take various forms, including flat admin fees (typically £50-£250), percentage charges on the transfer amount (usually 0.5-2%), or a combination.
Some providers waive these fees for transfers above a certain amount, often £20,000 or more.
3. Annual Management Charges
Ongoing charges for managing your pension typically range from 0.2% to 1.5% per year, depending on the provider and your investment choices.
The charges usually consist of a platform fee (about 0.2-0.5%) and fund management fees (about 0.1-1%). Modern workplace pensions often have lower charges while older personal pensions might have higher ones.
Some providers offer tiered charging structures that benefit larger pensions.
4. Investment Charges
It's essential to consider the total expense ratio (TER) which combines all investment-related charges that may apply to your chosen scheme.
These can include transaction costs when buying and selling investments (about 0.1-0.7%), performance fees for actively managed funds (typically 10-20% of returns above a certain level), and custody fees for holding investments (about 0.1-0.3%).
Some specialised investment options, such as ethical or sustainable funds, might have premium charges. There may also be costs associated with rebalancing your portfolio or switching between different investment options.
5. Advice Fees
If you seek professional advice (which is recommended for complex transfers) fees typically range from £500 to £5,000 depending on the size and structure of your pension pots.
The cost can also reflect the complexity of your situation, such as your guaranteed benefits or international transfers.
Many advisers provide ongoing services for an annual fee, typically 0.5-1% of the managed assets, which includes regular reviews and updates to your pension strategy.
6. Tax Implications
Under the new regulations effective from April 6, 2024, the Lifetime Allowance (LTA) has been abolished, eliminating previous tax implications for pension transfers exceeding £1,073,100.
However, it's important to be aware of the Overseas Transfer Charge (OTC), which may apply to certain transfers to overseas pension schemes. This charge is typically 25% of the transferred amount, unless specific conditions are met that qualify for an exemption. Therefore, while most pension transfers are tax-free, it's crucial to understand any potential overseas transfer taxes that could affect your situation.
You should also consider the impact on death benefits and inheritance tax planning. Some transfers might affect your protection status for previous higher lifetime allowances or other tax privileges.
If transferring to or from certain types of schemes (like final salary pensions), there may be implications for how you can access your benefits and how the withdrawals are taxed.
Finding the Best Consolidation Deal
To help you with the process of finding a consolidation deal, here's a checklist of things to consider as you compare schemes and make enquiries.
An adviser can provide personalised recommendations based on your specific needs and goals.
Our expert says:
"Pension consolidation can simplify your retirement planning by combining multiple pension pots into a single, manageable scheme. While it offers valuable benefits like reduced fees and better oversight, it's essential to carefully consider your existing benefits and take professional advice from an IFA if your pension pots are large or complex."
Frequently Asked Questions
How long does pension consolidation take?
The consolidation process typically takes between 2-8 weeks, depending on the number of pots you're consolidating and the providers involved. Some modern providers can complete transfers more quickly, while complex transfers, especially those with defined benefit schemes, can take several months due to the additional requirements and checks.
The timeline often breaks down into several stages: initial paperwork (1-2 weeks), processing by your current provider (2-4 weeks), and setup with your new provider (1-2 weeks). Some providers, like PensionBee and Aviva, offer online tracking so you can monitor your transfer's progress.
Transferring a simple defined contribution pension from a provider like Legal & General to another mainstream provider might take just 2-3 weeks. Transferring from an older workplace pension scheme from the 1990s could take 6-8 weeks due to the paperwork and manual processing involved.
Will I lose any benefits by consolidating my pensions?
This depends on your existing pension schemes. Some older pensions may have valuable features like or final salary guarantees or protected tax-free cash amounts above 25%.
It's crucial to check for these benefits before making any transfer decisions.Some pension schemes from the 1980s and 90s offer guaranteed annuity rates of 10% or more, which is much higher than the current market rates of around 4-6%. This could make a difference of £2,500+ per year.
Similarly, some schemes offer valuable death benefits, such as a guaranteed minimum pension for your spouse, which might be worth preserving.
Do I need financial advice to consolidate my pensions?
Financial advice is legally required if you're transferring a defined benefit pension worth more than £30,000. For other types of pensions, advice is recommended if your combined pension pot is substantial or if your pensions have complex features.
Sarah Pritchard, the FCA's Executive Director of Markets and International, says: "Financial advisers have a vital role in helping consumers to make the right decisions now to support them long into the future."⁵
Though advice is recommended, its use has recently declined. The FCA reports that only 46% of drawdown pensioners took professional advice in 2022-23 compared to 66% five years earlier.⁶
The cost of advice usually ranges from £500 to £5,000, depending on the complexity and value of your pensions. While this might seem expensive, making the wrong decision about your pensions could cost tens of thousands in lost benefits or returns during your retirement.
Professional advisers can provide detailed analysis of your existing benefits, calculate the critical yield needed from a new pension to match them, and help you understand the tax you may have to pay on the different options. They can also help identify "red flags" such as high transfer fees or current guarantees that might make consolidation unsuitable.
What happens to my pension while it's being transferred?
During the transfer process, your pension savings will be "disinvested" from your current scheme and "reinvested" in your new one. This period typically lasts a few days but can be longer. While your money is out of the market, you won't benefit from any market gains (or suffer any losses). Some providers offer special arrangements to minimise this "out of market" exposure.
The transfer process typically follows these steps:
1. Your current provider sells your investments and converts them to cash.
2. The money is transferred to your new provider.
3. Your new provider invests the money according to your chosen strategy.
To minimise any potential impact, some providers offer strategies such as:
Phased transfers: Breaking larger transfers into smaller chunks.
Transfer timing: Coordinating the disinvestment and reinvestment to minimise time out of the market.
Market matching: Some providers will backdate your investment to match market movements during the transfer period.
Modern platforms often use electronic transfer systems that can complete the entire process in as little as 24-48 hours, reducing the time your money is not invested. Some providers will even offer compensation if delays result in any significant investment losses.
Which pensions can and can't be consolidated?
You'll typically find your defined contribution (DC) and personal pensions simpler to move than your state pension or defined benefit (DB, or final salary) scheme.
Stakeholder pensions are particularly transfer-friendly and often feature low transfer costs and few complications. Your Self-Invested Personal Pension (SIPP) can also be versatile, accepting transfers from most pension types, making them a popular choice for consolidation.
You can technically transfer a DB pension into a DC scheme by getting the transfer value, but it's often advised against because you'd lose all guarantees and take on all the investment risk. The more common approach is to keep both types separate, using the DB as a guaranteed foundation and the DC as flexible retirement savings.
The rules are strict for state pensions, which can't be consolidated with personal pensions under any circumstances.
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Additional Information on Pension Consolidation
Want to understand more before making a move? These official resources offer guidance on combining your pension pots and what to consider before you do:
