Pension Consolidation and Transfers
Why it matters
Bringing multiple pensions together or transferring a pension from one provider to another can offer practical advantages, but it is not suitable in every case.
The processes of consolidation and transfer are often linked, but they serve different purposes and carry different risks.
Before making any changes to your pension arrangements, it is important to understand what these processes involve, how they work, and when they might be appropriate or potentially harmful.
What pension consolidation means
Pension consolidation means combining two or more separate pension pots into a single pension plan.
This is usually done by transferring each of the old pensions into a new or existing scheme.
Many people consider consolidation after working for several employers and accumulating various workplace pensions, each held by a different provider.
Why consolidate and how it’s done
For example, someone in their late 50s who has had six employers over the course of their career might find themselves with six different defined contribution pension pots.
Each scheme could have its own charging structure, fund range, and online access system. Keeping track of them all can be time-consuming.
Consolidation allows the person to move these pots into one modern pension, such as a self-invested personal pension (SIPP), where they can manage all their savings in one place.
Some modern pension providers offer dedicated consolidation services, which can be accessed online. These platforms may automatically identify eligible schemes and provide tools to initiate transfers.
However, not all pensions are suitable for consolidation. The details of each policy must be reviewed individually to assess the potential impact of transferring.
Why people consolidate their pensions
There are several reasons why someone might choose to consolidate pensions, depending on the types of pensions they hold and their retirement goals.
Simplifying account management
Consolidation can make pensions easier to manage by reducing the number of accounts that need to be monitored. Instead of contacting multiple providers to update details, track performance, or request information, a single scheme simplifies administration.
Reducing charges
Older pension policies may still apply charging structures that are no longer competitive. For example, a pension opened in the early 1990s might have an annual management charge of 1.5%, plus potential exit penalties. In contrast, a modern SIPP or workplace pension might charge only 0.3% annually. Over time, the difference in fees can significantly reduce the overall value of a pension pot.
Accessing better investment options
Some legacy pensions limit the funds available for investment. Others may not offer access to low-cost tracker funds, ethical investment choices, or risk-rated portfolios. Consolidating into a newer pension can give access to a broader and more flexible range of investments tailored to individual risk tolerance and retirement timeline.
Making retirement income planning easier
If someone is approaching retirement and considering options like drawdown or annuity purchase, having a single consolidated pot can make it easier to decide how and when to access funds. Providers may also offer better tools for estimating income and planning withdrawals.
Despite these potential benefits, consolidation is not always suitable. Some pensions contain valuable guarantees or protections that would be lost on transfer. These must be assessed on a case-by-case basis.
What a pension transfer involves
A pension transfer is the act of moving a pension pot from one provider or scheme to another. This might be a single transfer between two defined contribution schemes, such as moving from a workplace pension to a personal pension.
It can also include more complex transfers between pension types, such as moving a defined benefit scheme into a defined contribution plan.
Reasons for a transfer
Transfers can happen for several reasons:
- To reduce fees charged by the current provider
- To gain more control over investment choices
- To consolidate into a single pension plan
- To access more flexible income options
For example, someone with a defined contribution workplace pension worth £45,000 may decide to transfer it into a SIPP to access a wider range of investment funds.
Alternatively, someone with three small pensions from old jobs may decide to transfer them into one scheme to simplify their future planning.
Defined benefit pension transfers
Transfers involving defined benefit pensions follow a different set of rules. Defined benefit pensions promise a fixed income in retirement, usually based on final salary or average earnings.
Transferring out means giving up this guaranteed income in exchange for a lump sum that is invested in a defined contribution scheme.
Because this carries significant risk, it is only recommended in limited circumstances.
The difference between consolidation and transfer
The terms consolidation and transfer are sometimes used interchangeably, but they refer to different aspects of pension management.
A transfer is the process of moving pension money from one scheme or provider to another. Consolidation is the result of using multiple transfers to bring all your pensions into one plan.
If someone has five pension pots and moves them into one scheme, they have carried out five transfers. The overall outcome is consolidation.
When caution is necessary
Consolidating or transferring a pension is not always the right decision. There are specific situations where doing so could lead to irreversible losses.
Defined benefit pensions
Transferring out of a defined benefit (DB) pension means forfeiting a guaranteed, inflation-linked income that is backed by an employer.
In many cases, the scheme also provides a spouse’s pension and other built-in protections. Once transferred, these benefits are lost permanently.
The new defined contribution pot will fluctuate with investment performance and place responsibility for retirement planning onto the individual.
The Financial Conduct Authority (FCA) considers DB transfers to be high risk. The law requires that any transfer over £30,000 must be accompanied by regulated financial advice.
Unless someone is in exceptional circumstances, such as terminal illness, overwhelming debt, or intending to emigrate permanently, transferring out of a DB scheme is unlikely to be recommended.
Safeguarded benefits in older pensions
Some older defined contribution pensions include special features that are no longer available in modern schemes.
These may include:
- Protected tax-free cash above 25%
- Guaranteed annuity rates (GARs) that exceed current market rates
- Contractual early retirement ages
For example, a pension set up in the late 1980s might offer a guaranteed annuity rate of 9%, far higher than the current average of around 5%. Transferring this pot to a modern scheme would mean losing access to the higher rate.
Exit charges and transfer penalties
Certain pensions apply penalties for transferring out, especially if they were originally designed as long-term investments. These might be expressed as a percentage of the fund or as fixed charges.
For instance, a pension worth £20,000 might apply a 5% exit charge, reducing the transferred amount to £19,000.
These charges must be factored into the decision before initiating a transfer.
When financial advice is required
If you hold a defined benefit pension or any pension with safeguarded benefits worth more than £30,000, it is a legal requirement to seek advice from a regulated financial adviser before transferring.
This rule is designed to protect consumers from giving up valuable benefits without fully understanding the consequences.
When advice is helpful
Even when advice is not required, it may be helpful in situations where:
- The pension contains features or guarantees you are unsure about
- You are weighing up the pros and cons of consolidation
- You need help assessing investment choices and future income needs
Advice should be independent, and the adviser must be authorised by the Financial Conduct Authority. A provider offering its own consolidation service is not allowed to recommend a transfer unless it assesses your existing arrangements in full.
Finding and checking your old pensions
Before making decisions about consolidation, it is essential to know what pensions you have, where they are held, and what benefits they offer.
Many people have forgotten or lost track of workplace pensions set up before automatic enrolment.
If you think you may have old pensions, the following steps can help you locate and assess them:
Reviewing annual statements
Most pension providers issue an annual statement that shows the current value of the pot, investment performance, charges, and any special features.
These documents can reveal whether the pension includes a guaranteed annuity rate or protected tax-free cash.
Using the government Pension Tracing Service
If you no longer have paperwork or do not know the provider, the government offers a free Pension Tracing Service.
You provide the name of your former employer, and the service returns contact details for the relevant pension scheme administrator.
This tool does not show pension values but helps you reconnect with the provider.
Comparing features across pensions
Once all pensions have been identified, compare the fees, fund options, performance history, and any guarantees or restrictions.
Not all pensions are equal, and some may include valuable elements that are not visible without careful review.
Frequently asked questions
Can old workplace pensions be combined?
Yes, most defined contribution workplace pensions can be transferred and consolidated. This is especially common for people who have changed jobs multiple times. However, it is important to check for any restrictions, exit charges, or safeguarded benefits before proceeding.
Does transferring a pension result in financial loss?
A pension transfer does not automatically lead to a loss. However, if the pension being transferred contains guarantees or is subject to fees that outweigh the potential benefits of moving, it can reduce your future income. The risk comes from not understanding what is being given up.
Is it better to have one pension or several?
There is no single correct answer. Some people prefer a single, consolidated pension for ease of management and cost efficiency. Others retain multiple pensions to preserve benefits or spread risk across different providers. Each pension must be evaluated on its own terms before deciding.
How do I know if a pension is worth transferring?
To assess whether a pension should be transferred, compare charges, investment performance, available fund choices, and any special features such as GARs or protected tax-free cash. Services such as the MoneyHelper pension comparison tool can assist with this. Professional advice may be necessary for complex cases.
Can I transfer a pension without professional help?
Yes, you can transfer a defined contribution pension yourself by contacting the new provider or using an online platform. However, if the pension includes safeguarded benefits and is worth more than £30,000, advice from a regulated financial adviser is legally required before any transfer can take place.
