Consolidating pensions: costs, benefits and risks

Bringing all your pension pots together might seem like an obvious thing to do but, as Helen Morrissey of Royal London explains, it's not right for everyone.

It has been said that the average person will have 11 different jobs over the course of their lifetime.

If you were in your workplace pension scheme in even some of these roles, then you will have several pension pots.

While it may seem sensible to consolidate these pots so they are easier to manage there are several things you should consider before you do so.

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Costs and charges to consider

The likelihood is that each pension is set up differently with different charges and you may find you incur exit fees when you combine pots.

You may also find that some of your pensions have higher charges depending on what you are invested in for instance.

It is worth going through your different pensions with a financial adviser to compare charges and making sure that the investment strategies you are invested in continue to meet your needs.

Guaranteed Annuity rates

Some older pension products have valuable benefits attached to them such as Guaranteed Annuity rates.

An annuity will pay out a fixed level of income to an individual for the rest of their lives.

The rates attached to these products can be significantly higher than those currently available and you risk throwing this extra money away by consolidating.

It is always worth checking whether any of your pensions have guaranteed annuity rates attached before making a decision.

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Other hidden benefits

You may have other benefits attached to your pension that you would lose if you consolidated.

For instance, some older pension products allow you to access your pension before the age of 55.

Others may allow you to withdraw tax-free cash in excess of the current 25% limit.

Again, it is worth having a chat with a financial adviser to make sure

How big is your pot?

While having one large pot may seem simpler than having several smaller ones there are some benefits of having a smaller pot that you could miss out on by consolidating.

For instance, if you have a defined contribution (DC) pension worth more than £10,000 that you are still saving into then if you take taxable cash from it you could fall foul of the Money Purchase Annual Allowance (MPAA).

Every pension saver has an annual allowance which is the amount you can save into a pension while still benefiting from tax relief.

For most people, this will be £40,000 per year.

However, if you access cash from a DC pension you are still paying into then this limit is cut to just £4,000 per year – this is what is called the MPAA.

However, if you take money from a pension worth less than £10,000 then you won’t trigger the MPAA.

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Keep an eye on the Lifetime Allowance (Image: Shutterstock)

Lifetime Allowance

In addition to having an Annual Allowance, pension savers also have a Lifetime Allowance – currently £1,055,000.

Taking money from your pension will usually trigger a check on whether you have reached this allowance. If you have then you may have a large tax bill.

However, you can take up to three pots of under £10,000 without it counting towards your lifetime allowance.

Speak to a professional

So, there are plenty of things to consider before making the decision to consolidate your pots.

I would recommend you speak to a financial adviser to make sure you aren’t throwing away valuable benefits.

Helen Morrissey is a pension specialist at Royal London

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