Should I consolidate my pension pots?
The UK is reckoning with a proliferation of small pension pots, which is increasing costs for providers and making retirement planning challenging for savers.
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According to research from the Institute of Fiscal Studies, in 2024 there were 12.1m defined contribution (DC) pension pots which held less than £1,000 and were no longer receiving contributions.
These pots held £4bn in aggregate, with the IFS having observed that some savers even hold different pots with the same provider.
The government is under pressure to tackle this messy landscape of pension pots. New technology will hopefully soon be available to savers to help them to track down their pots.
The pensions industry has spent the best part of a decade working on an initiative – known as the pensions dashboards – that will aim to present all of a saver’s pensions, online, in one place. The government has not yet confirmed when savers will be able to access the dashboards.
There are administrative advantages to consolidating pension pots. “People do like the idea of simplification and combining them all together,” says Sam Binstead, chartered financial planner and investment director at Chilvester Financial.
Avoid drawing income from more than one pot
As savers await the launch of the pensions dashboards, there are already several – albeit more arduous – means of tracking down pension pots.
This includes simply contacting former employers. “Sometimes we have to encourage clients to do that,” says Binstead. “If they really don’t know who the pension scheme was administered by, they’re just going to have to get back in touch with the previous employer.”
Savers can also use the government’s pension tracing service to track down old pensions. They can enter their former employers’ details into the government database and obtain contact details for schemes that they may have paid into. This is useful for schemes associated with companies that no longer exist.
Once they have tracked down all of their pots, they can tell a current provider that they want to consolidate their pensions.
Consolidating pots “can be a very effective way of more easily administering pensions”, says Arthur Hill, chartered financial planner at Citygate Financial Planning, and is particularly suitable for those coming up to retirement. “You don’t want to be taking income from several pots at the same time, it can cause issues with tax codes and just make your life a right hassle”, he says.
But savers need to check that any charges in a consolidated pot aren’t higher than they already are, and that consolidation does not risk costing savers benefits that they are entitled to.
Modern DC pensions have a standard rate of 25 per cent of tax-free cash of their total pension value, up to a limit of £268,275. But some older legacy pensions may carry rights to protected tax-free cash in excess of this 25 per cent figure, and this right can be lost upon transferring a pot into a different scheme.
Hill warns that consolidation can lead to “pretty devastating consequences if someone were to consolidate a pension without properly considering all their options first”.