Pension warning: Should you consolidate pots? ‘Unexpected disadvantages’ to watch out for


Contributions to private pension funds are something many people will do. All employers must provide a workplace pension scheme, and this is known as “automatic enrolment”. The employer must automatically enrol a person into a pension scheme and make contributions to it, provided the individual fulfils four conditions. These are that they are classes as a “worker”, aged between 22 and state pension age, earn at least £10,000 per year, and that they usually work in the UK.

Some may make contributions into other types of pension funds, such as a personal pension.

Another major development in terms of pensions is the pensions dashboard, which will enable a person to see the different pensions they have amassed over their life, in one place.

It may be that with these two factors, some people may wonder whether they should combine small pension pots in one place.

That’s according to Steve Webb, the former Minister of State for Pensions, who is a pensions commentator now serving as the Director of Policy at Royal London.

Addressing these two developments and the matter of whether it could lead millions of savers to consolidate smaller pension pots into one larger pot, Mr Webb has issued a warning to savers.

He is suggesting savers “think carefully” and seek expert advice or guidance before doing so.

Steve Webb, Director of Policy at Royal London, said: “One of the questions I am asked more often than any other is whether people should combine all of their pensions in one place.

“Whilst that may seem the tidiest thing to do and can have some advantages, there are also a number of unexpected disadvantages to merging pension pots.

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“Older pension policies may have attractive features which would be lost if transferred, whilst small pots benefit from certain tax privileges which do not apply to larger pots.

“As ever, the best approach is to seek impartial advice or guidance before consolidating pension pots.”

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It comes as Royal London identified five reasons why it could be worth thinking twice about consolidating a person pot:

Throwing away enhanced tax free cash or early retirement options attached to old pensions

Some pensions, especially those taken out before ‘A day’ in 2006, allowed members to draw more than 25 per cent of the pot tax free or to access the pension before age 55; if these pensions are transferred out individually, those privileges can be lost.

Throwing away ‘guaranteed annuity rates’ attached to older pots

When some pensions were sold, they carried a promise that the pot could be turned into a guaranteed income in retirement; given the collapse in annuity rates in recent years these guarantees are extremely valuable but can be lost if people simply transfer out into another pension.

Paying ‘exit penalties’ when combining pension pots

While modern pension policies can generally be merged without penalty, savers can face exit charges if they want to take money out of older policies.

Missing out on ‘small pot’ privileges for those with lifetime allowance issues

Accessing a pension generally counts against your lifetime allowance (currently £1.055m); but savers are allowed to take up to three ‘trivial’ pots of under £10,000 without counting against the LTA; those who retain small pots rather than combining them effectively add £30,000 to their LTA.

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Missing out on ‘small pot’ privileges for those still saving into pensions

Taking taxable cash from a defined contribution pension triggers a cut in the saver’s annual allowance from £40,000 to £4,000 via the ‘Money Purchase Annual Allowance’; but taking a small pot under £10,000 does not do so; those who consolidate all their small pots miss out on this privilege.

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