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So, it is no surprise that many people consider consolidating their pensions into one place. It can simplify your administration, help you keep track of performance, and make retirement planning easier.
However, consolidation is not always straightforward, and in some cases, it can lead to the loss of valuable benefits that you cannot replace.
This article, accompanying Episode 47 of the Retire Well with Wealth of Advice podcast, highlights the pension consolidation traps to be aware of and how to transfer safely.
Bringing multiple pensions together can offer several advantages:
Before consolidating, it is important to understand what you might lose by transferring.
Many people consolidate to access a wider range of investments, but it is essential to make proper comparisons.
Charges can be more complex than they first appear.
Always review the total charge picture, not just a single figure.
This is where people often give up significant long-term value by transferring.
Some older pensions offer Guaranteed Annuity Rates, often between 8% and 11%.
For example, a £100,000 pot with a Guaranteed Annuity Rate of 11% could provide around £11,000 a year, GAR but only about £6,000 at normal market rates of 6%.
Losing this could cost more than £150,000 over a typical 30-year retirement.
Section 32 buyout policies and certain with-profits pensions may offer guaranteed annual growth. It’s important to understand how valuable these are to you and expected market returns.
Many with-profits funds also apply terminal bonuses if the plan is held to maturity. A transfer may remove this entirely.
If you suspect your pension includes any of these guarantees, review it carefully before considering consolidation.
Older pensions can offer valuable non-financial protections that are lost on transfer.
Before 2006, some schemes allowed more than 25 per cent of the pot to be taken tax-free.
If you were to consolidate one of these pensions with another scheme it can easily be lost.
If you were a member of a scheme before 2021, you may have a protected pension age of 55 rather than 57 (the new Minimum Pension Age from April 2028).
Losing a protected pension age may affect redundancy planning, early retirement, or your cashflow strategy, particularly if you were planning to retire early.
Although not specific to consolidating a pension, if you consolidate a small pension and immediately withdraw from it, you could trigger the Money Purchase Annual Allowance (MPAA). This reduces the annual pension contribution allowance from £60,000 to £10,000.
Up to three personal pensions under £10,000 can be taken as lump sums without triggering the MPAA, keeping your options open for large pension contributions.
Pension scams remain a significant risk, particularly when people are consolidating.
Warning signs include:
A legitimate transfer will never rely on loopholes or guarantee unrealistic returns.
Transferring out of a DB scheme is something that often requires formal advice and should not be a decision that is made lightly.
If the transfer value is £30,000 or more, regulated financial advice is legally required.
DB pensions provide guaranteed, often inflation-linked income, which is difficult to match elsewhere.
Sometimes seen in public-sector transfer clubs such as the LGPS, but even then, accrual rates and scheme rules can differ significantly.
Always request comparisons and illustrations before making a decision.
Pension consolidation can be an excellent way to streamline your finances, reduce charges, and access more flexible retirement options. However, it is crucial to understand what you may be giving up before you transfer.
A thorough review will highlight the benefits, costs, guarantees, risks, and whether consolidation genuinely leaves you in a better financial position.
If you want to understand whether consolidation is right for you, or you are unsure what features your existing pensions hold, Wealth of Advice can help.
We can review your pensions in detail, explain your options clearly, and guide you through a safe and informed decision.
Please feel free to contact us to discuss your pensions and retirement plan.
If you want a better view of what your future could be, we'll have a chat and work out if we make a good fit for you and your financial picture.
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