Should you bring your old pensions together?

The average British worker will hold eleven jobs across a career. Since automatic enrolment arrived in 2012, most of those jobs come with a pension attached, which means a great many people in their forties and fifties are sitting on a scattered collection of pots they have not thought about in years. Some are worth a few hundred pounds. Some are worth six figures. Most people could not tell you which is which.

The obvious solution is to gather everything into one place. One provider, one login, one annual statement, one set of investments to keep an eye on. Consolidation is the most commonly requested piece of work in a financial adviser's diary and, in a large number of cases, it is genuinely the right answer. But it is not automatically the right answer, and the cases where it is wrong tend to be the cases where it is most expensive to get wrong.

This article sets out what consolidation actually achieves, what it can destroy, and the checks that need to happen before anything is transferred.

What you actually gain

Start with the honest benefits, because they are real and they are worth having.

The first is visibility. It is close to impossible to plan a retirement income when the underlying assets are spread across five providers with different statement dates, different assumptions and different projection methods. Bringing the money together turns a vague sense of having something put away into a single number you can work with. That number is often the thing that changes behaviour. People who discover they are further behind than they thought start saving more. People who discover they are further ahead than they thought sometimes retire two years earlier than planned.

The second is investment control. Old workplace pensions are frequently parked in whatever default fund was selected when you joined, which may bear no relationship to your age, your timescale or your appetite for risk. Default funds are designed to be inoffensive to the entire workforce rather than appropriate to any individual in it. A fifty five year old sitting in a fund designed for a twenty five year old, or the reverse, is carrying risk nobody chose deliberately.

The third is cost. Older personal pensions written in the 1990s or early 2000s can carry annual charges of 1.5 per cent or more, sometimes with additional policy fees on top. Modern platforms will frequently do the same job for a total cost between 0.5 and 0.9 per cent including advice. On a pot of £120,000 over fifteen years, a saving of 0.7 per cent a year compounds into a meaningful sum. Charges are the one variable in investing you can actually control.

The fourth is administrative simplicity at the point it matters most. When someone dies, their family has to deal with whatever pension arrangements are left behind. Four providers means four sets of forms, four bereavement teams and four expression of wish forms that may or may not be up to date. One provider is considerably kinder to the people sorting out your affairs.

What you can lose

Now the other side. These are the reasons an adviser will sometimes recommend leaving a pension exactly where it is, and they are not theoretical.

Guaranteed annuity rates are the big one. A number of pensions sold in the 1980s and early 1990s carry a contractual promise to convert the fund into income at a fixed rate, frequently between 9 and 11 per cent. Current open market annuity rates for a healthy sixty five year old sit far below that. A guaranteed rate of 10 per cent on a pot of £80,000 produces £8,000 a year for life. The same pot bought on the open market might produce a little over half that. Transferring the pension extinguishes the guarantee permanently, and nobody will give it back.

Guaranteed minimum pension is a related trap. Pensions that were contracted out of the State Earnings Related Pension Scheme carry a floor on the income they must provide from a particular age, often with its own escalation rules. That floor is a safeguarded benefit. It cannot be replicated by moving the money elsewhere.

Defined benefit schemes, sometimes still called final salary schemes, are a category of their own. These do not pay out a pot of money. They pay a promised income for life, usually increasing with inflation, usually with a widow or widower's pension attached, backed by the sponsoring employer and ultimately by the Pension Protection Fund. Where a transfer value exceeds £30,000, the law requires you to take regulated advice before the scheme will release the funds. The regulatory starting assumption is that transferring out is unsuitable, and in most cases it is. The certainty of an inflation linked income for life, with no investment decisions required of you ever again, is worth a very great deal more than most transfer values reflect.

Protected tax free cash appears in older contracts too. The standard entitlement is 25 per cent of the fund, but some policies protect a higher percentage, occasionally reaching 100 per cent for certain historic arrangements. Transferring usually resets that entitlement to the standard 25 per cent.

Protected pension age is worth checking for anyone with contracts written before 2006. Some policies allow benefits to be taken earlier than the normal minimum pension age, which rises to 57 in April 2028. Moving the money generally loses that right.

Exit penalties still exist on older with profits and unit linked contracts, sometimes as a market value reduction applied at the point of transfer. On a policy approaching a valuable terminal bonus date, waiting eighteen months can be worth thousands.

Employer contributions are the simplest and most frequently overlooked point. You cannot consolidate the pension you are currently paying into without stopping the employer money that comes with it. Current scheme membership stays put.

The order the work should happen in

Good consolidation work follows a sequence, and the sequence exists because skipping steps is how expensive mistakes happen.

• Find everything. The government's Pension Tracing Service will locate schemes from former employers using the employer name. Old paperwork, payslips and P60s fill in the gaps.
• Request full information from each provider, not just a valuation. The letter needs to ask specifically about guaranteed annuity rates, guaranteed minimum pension, protected tax free cash, protected pension age, exit penalties and the total annual charge.
• Value the benefits, not the pots. A pension with a guaranteed annuity rate should be assessed on the income it will produce, not the transfer value printed on the statement.
• Compare charges properly, in pounds rather than percentages, and include the cost of ongoing advice so the comparison is honest.
• Decide pension by pension. Consolidation is not an all or nothing decision. Moving four pots and leaving the fifth where it is because it carries a guarantee is a completely normal outcome.
• Update the expression of wish on whatever remains, and on the new arrangement. This is the single most commonly forgotten step and it determines who receives the money.

A worked example

Consider a client of fifty eight with five arrangements. Two small workplace pots totalling £14,000 in default funds charging 0.75 per cent. A personal pension from 1998 worth £62,000 charging 1.4 per cent with no special features. A current workplace scheme receiving contributions. And a £40,000 policy from 1989 carrying a guaranteed annuity rate of 10.5 per cent.

The recommendation writes itself once the information is in. The two small pots and the 1998 personal pension move to a single modern arrangement, cutting the charge on £76,000 from an average of roughly 1.28 per cent to around 0.8 per cent including advice, and putting the money into an allocation that actually reflects a seven year timescale. The current scheme stays because the employer contribution is worth more than any charge saving. And the 1989 policy stays exactly where it is, because £40,000 converting at 10.5 per cent produces £4,200 a year for life against roughly £2,400 on the open market. That single decision is worth more than every other element of the exercise combined.

The value in this work is rarely in the transfers. It is in identifying the one pension that should never be touched.

Questions worth asking

Whether you take advice or investigate this yourself, these are the questions that need answers before anything moves.

• Does this policy carry a guaranteed annuity rate or a guaranteed minimum pension?
• Is my tax free cash entitlement more than 25 per cent?
• Is there a protected pension age attached to this contract?
• What penalty applies if I transfer today, and does it fall away on a particular date?
• What is the total annual cost, including any policy fee, expressed in pounds?
• What is the fund actually invested in, and does that match when I intend to retire?
• Who is currently nominated to receive this if I die, and is that still who I would choose?

Where this leaves you

Consolidation is a tool, not a goal. Tidiness has genuine value, particularly when it turns an unknowable collection of paperwork into a retirement plan you can actually make decisions about. But the tidying should never be allowed to override the arithmetic. A guaranteed income of ten per cent for life does not become less valuable because it arrives on an ugly statement from a provider with a bad website.

The work is mostly investigation. Gather the information, examine each arrangement on its own merits, and be prepared for the answer to be different for each one. If you would like a second pair of eyes on what you hold, an initial conversation with Randall Financial Solutions is at our expense and carries no obligation.

The value of investments and the income from them can fall as well as rise and you may get back less than you invested. A pension is a long term investment and the value of benefits can be affected by future tax rules and investment performance. Transferring out of a defined benefit scheme is unlikely to be in the best interests of most people.