Over your lifetime, you’re likely to work at a variety of companies. With employers now offering the majority of employees a pension from day one, it could make retirement planning difficult. Pension consolidation could provide a solution. But it’s not always the best option.

Staying with a company throughout your career is no longer the norm. Today, you’re just as likely to swap jobs every two or three years. It can help you get ahead and build up skills. However, it can also create a headache when retirement planning. Thanks to auto-enrolment every employer must offer a Workplace Pension for eligible employees. That’s good news for your retirement savings but could mean you end up with many small pots.

Pension consolidation could provide a solution. Pooling all your retirement savings together has some obvious benefits.

At the top of that list is how easy your retirement savings are to manage. Having all your savings in a single place means it’s far easier to keep track of how much you’re putting away. When you reach retirement age, you may also find it’s clearer what level of income is sustainable.

In some cases, pension consolidation can also reduce charges. As a result, it can help your savings stretch further and get the most out of contributions.

It may seem like consolidating pensions is the obvious solution. But there are some reasons why it isn’t always the best option.

1. Existing pensions come with benefits

Some pensions will come with additional benefits that may be useful to you. This is particularly true for older pensions.

For example, some pensions will allow you to withdraw an initial lump sum that exceeds the usual 25%. Others provide a guaranteed Annuity rate that may be far higher than the rates offered today. Transferring out of a pension will typically mean you lose these benefits and you won’t be able to get them back.

Before you even consider consolidating pensions, check the benefits they offer. In some cases, they may be valuable in your circumstances. They could improve your financial security in retirement.

2. Exit fees are high

Will you need to pay a penalty for moving your pension? The answer is usually ‘no’ but it’s worth checking. Some providers will have exit charges when you choose to consolidate.

These fees should influence your decision. For example, it may be worth paying a one-off cost if your monthly charges are lower as a result of selecting a pension provider with more competitive rates. Pension charges are usually calculated based on the value of your savings. So, if your charges are broadly the same across pensions, you may not make little or no savings through having a single pension over multiple pots.

Where an exit fee is higher, it may be in your best interest to leave your savings where they are even if ongoing fees are more competitive. So, make sure you weigh up the impact of potential exit fees before you proceed.

3. You’re close to the Lifetime Allowance

The current Lifetime Allowance is £1.055 million. Saving above this figure into pensions means you’ll face additional tax charges.

Whilst the Lifetime Allowance sum can seem high, it’s easier to exceed than you think. When you consider you could be paying into a pension for over 40 years, contributions and investment returns add up. Exceeding the Lifetime Allowance can attract tax charges of up to 55%. This could have a huge impact on your retirement plans.

Savers can access up to three small pots of up to £10,000 from personal pensions and an unlimited number from occupational pension schemes, without these withdrawals counting towards your Lifetime Allowance.

4. You want to make a withdrawal and still pay into a pension

Pensions became more flexible in 2015 under Pension Freedoms. Since then, you have been able to access your pension from the age of 55.

For many, working life continues beyond 55. But being able to access your pension whilst working can provide more flexibility. However, when you access a pension it could trigger the Money Purchase Annual Allowance; this drastically reduces the amount you can save in a pension tax efficiently. Crucially, small pot lump sums don’t trigger the MPAA. This could provide you with a way to access a portion of your retirement savings early and still save efficiently for the future.

The maximum you can save into a pension whilst still benefitting from tax relief is £40,000, known as the Annual Allowance. If you trigger the MPAA, this falls to £4,000. But you can access a small pension, with a value under £10,000, without the MPAA applying.

Please note, your Annual Allowance may be lower than £40,000 depending on your income.

Choosing the right option for you

So, should you merge your pension? There’s no right or wrong answer; it should depend on your circumstances and retirement goals.

For some, pooling retirement savings together makes sense for a variety of reasons. For others, keeping smaller pensions separate provides flexibility and is more tax efficient. It’s important to look at your current pensions and the retirement lifestyle you want before proceeding. We can help you understand what your options are and how they could influence your wealth and goals. If you’d like to discuss your pensions, please get in touch.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulations which are subject to change in the future.