Should I merge my pension pots in one place?

Savers collect a string of pension pots during their working lives but only one in four have merged any of them, new research reveals.

Some 47 per cent of people have two or more pensions, while 20 per cent have three or more, and 4 per cent have five or more pots – and the higher the number, the more likely you are to lose track of them.

A tidying up exercise can reduce fees and paperwork and bring new investment options, and more people took the opportunity to do this task during the pandemic, according to Hargreaves Lansdown, which carried out the survey.

Retirement finances: Savers collect a string of pension pots during their working lives

But senior analyst Nathan Long warns merging pensions is not always advisable because you can lose valuable benefits – see below for the traps to avoid.

Hargreaves, which surveyed 2,000 people about their pensions in April 2021, found 26 per cent of men have transferred a pension compared with 22 per cent of women.

‘The third lockdown finally achieved what years of guilt and wasted cash have failed to do – they persuaded more people to switch their pensions,’ says Long.

‘It’s definitely not right for every situation, but one in four is a ridiculously low proportion, and leaves millions of people at risk of building up lots of small pots and losing track of them.’ Read a guide to finding lost pensions here.

Long says the introduction of auto-enrolment in 2012 means plenty of workers have signed up to their company pensions without really engaging with them, and typically those pots are left behind when people change jobs.

What are defined contribution and final salary pensions?

Defined contribution pensions take contributions from both employer and employee and invest them to provide a pot of money at retirement.

Unless you work in the public sector, they have now mostly replaced more generous gold-plated defined benefit – or final salary – pensions, which provide a guaranteed income after retirement until you die. 

Defined contribution pensions are stingier and savers bear the investment risk, rather than employers. 

‘Not only does consolidating your pension help you keep an eye on it, it also helps you manage your pensions more effectively.

‘The biggest trend we see among our clients is those in their 50s transferring their defined contribution pots so they can view all their pensions in one place.

‘It means in the run-up to retirement, it’s easier to manage their savings, and they can think about how they’d like to take cash out when they stop working.’

Long believes more savers in their 50s will do this in future, because at the moment a lot of people are simply cashing in small pension pots and then relying on final salary schemes in retirement.

However, those with only defined contribution pensions are likely to want to consolidate them.

‘The squeezed middle (aged 35-54) have more pensions on average than any other age group. They’re no more likely to have transferred than their younger counterparts,’ he says.

Former Pensions Minister and This is Money columnist Steve Webb has previously explained why it can be sensible to hang on to old pensions, even if they are relatively small and you think it would be more convenient to manage them together. 

In a recent column, he also looked at how the rise in the age when you can access private pensions from 55 to 57 from 2028 could affect decisions to transfer pots in future.

He points out that the Government consultation says individual pension providers and schemes can ‘go early’ with this age rise if they wish, so it is important to check this out before switching between them.

Webb, who is now a partner at LCP, says: ‘It is vital to talk to someone impartial who understands pensions before moving money around.



‘There is a risk that you could inadvertently give up important features of your existing pensions, including the ability to access them at 55.

‘There is also a risk that you could throw away the tax advantages associated with very small pension pots.’ 

What are the pitfalls of merging pensions?

Guaranteed annuity rates: ‘These are often significantly higher than today’s rates,’ says Long.

‘Even if you think you don’t want an annuity, it’s worth speaking to the provider first, as you may be able to alter it.

‘And remember, it’s important to consider individual pensions as a building block of your overall income. So, while you could go into drawdown with your other pensions, having a decent income from a GAR could prove very useful.’

Guaranteed fund returns: ‘These tend to be few and far between, but some pensions guarantee a minimum level of return every year. Depending on the terms, these could be worth holding onto,’ warns Long. 

Bigger lump sums: ‘Some company pensions that were set up before April 2006 allow members to take a tax-free lump sum of more than 25 per cent,’ says Long.

But he adds that a transfer might be worthwhile anyway, as you may have limited growth prospects and retirement options in an old pension.

Large exit penalties: ‘Most modern pensions charge little or nothing to transfer, however some older-style pensions can charge bigger sums, including market value reductions if you’re invested in a with-profits fund,’ says Long.

‘Be aware that exit fees are capped at 1 per cent after the age of 55, so if you’re fed up with the pension, a low-cost transfer is usually available before drawing income or taking lump sums out.’

Ongoing employer contributions: ‘Your employer may have put you into a scheme you don’t like, but leaving that pension will only make sense if you get to keep the contributions your employer makes on your behalf.’

Long adds: ‘Some employers will allow these to be redirected to another pension, but most won’t. In these instances, it is usually best to just collect the contributions and consolidate when you leave the company.’

Protected pension ages: ‘In old pensions this can be as low as 50, whilst under the current Treasury plans you could lose a protected age of 55 and not be able to access your money until 57,’ says Steve Webb.

What is the lifetime allowance? 

This is the total amount you can hold in pensions without facing a potential tax penalty.

For a defined contribution or personal pension it is the total pot, so includes any contributions you or your employer make and the investment growth.

For a final salary or other defined benefit pension it is worked out by multiplying your expected annual pension by 20.

The lifetime allowance affects an individual, so they would need to add together all their pensions to see if they are at risk of going over it.

In his last Budget, Chancellor Rishi Sunak announced this allowance will remain at £1,073,100 until 2026. Read more here.

Small pot privileges: ‘You can cash in three sub-£10,000 pots and none of them counts against your lifetime allowance but cashing on one pot of £30,000 would use up £30,000 of your lifetime allowance,’ says Webb.

‘Consolidating in this scenario could cost you thousands in tax charges.’ 

What about final salary pensions?

Outside the public sector, generous final salary pensions paying a guaranteed income until you die, plus valuable death benefits to surviving spouses, have virtually been wiped out.

Many savers have also voluntarily ditched these traditionally safe ‘gold plated’ pensions in recent years, tempted by huge transfer value offers, greater potential investment growth and inheritance advantages.

You are required to get paid-for financial advice if your transfer value is £30,000-plus, which is a longstanding safeguard against making mistakes you can’t take back later.

Last year, regulators ordered pension schemes to start sending anyone requesting a cash valuation – which signals interest in ditching a final salary pension – a warning letter telling them it’s unlikely to be in their best interests.

This urged them not to act in haste during the coronavirus crisis, and alerted them against scams. 

Long says: ‘These pensions offer a guaranteed income in retirement, so it’s rarely advantageous to move them.

‘In addition, the transfer values offered in exchange for the benefits given up normally undervalue the pension. The starting point for any savers fortunate enough to have a final salary scheme is: don’t transfer it.

‘However, there are some niche circumstances where a transfer can make sense, such as in serious ill health, or if the death benefits don’t suit the family situation.

‘Or if you’re very lucky and only have final salary schemes; in this case you could transfer one of them to a defined contribution pension to give you some flexibility.’

What should you consider before ditching a final salary pension? 

You should think about the following before abandoning this type of pension.

1. They are the most generous and safest pensions available

2. Employers are responsible for closing pension deficits

3. A lifeboat scheme is there if firms collapse

4. You bear the full brunt of stock market volatility after you transfer out 

5. Inheritance rules are favourable, but might change.

Read more here. 


Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.