To consolidate small pensions pots or not?

To consolidate small pensions pots or not?

One of the consequences of workplace pension schemes is an increasing number of people with small pension pots that are not being contributed to and not being managed either by the client or by an adviser. Employers are only required to pay into a single qualifying pension scheme, so there is no incentive for an employer to make any payments into old schemes.

For the employee, this gives them a bit of a dilemma; do they consolidate all of the pension funds together or do they just leave it until actual retirement?

For an adviser, this is a difficult question as an advised transfer is likely to cost over £1,000, almost irrespective of size, so recovering the cost of advice could be difficult if the fund is small or retirement is around the corner.

The key consideration has to be the management cost of the old pension. Any pension set up after 2002 is likely to be on stakeholder or “stakeholder friendly” terms, so charges are capped at 1.5% per annum and transfers out should be without penalty. A new workplace pension scheme will have at least one fund with a total cost of 0.75%, so there is a possibility of a small saving with consolidation, but this saving is probably too small to matter.

Yes, I know the new scheme is 50% cheaper, but on a £10,000 fund, we are talking of savings of £75 per year, so it would take 13 years, 4 months to recover the cost of advice, if it was £1,000 and longer if it was any more.

For a basic pension scheme set up under stakeholder or “stakeholder friendly” rules, there is an argument to leave well alone. For one thing, pension pots of under £10,000 can be taken at any time after 55, giving you a great deal of flexibility and an efficiency of saving higher than almost any alternative.  No more than 3 small pots of less than £10,000 each can be taken as cash once you pass 55, leaving your other pension schemes in place. An outline of the rules can be found here:

For a scheme that predates stakeholder terms or with larger fund values, funds charges become more significant. Going back to the late 1980s, pension charges of 3-4% and fund switches with a 5% bid/offer spread were not uncommon, so an old pension held in cash funds will be reducing in value rather than growing.

Unfortunately charges are not the whole picture; older schemes often had fund or annuity guarantees that can be very valuable at the Normal Retirement Age, (NRA), and much less valuable at any other time. Sorting out the value of these older schemes can be very complex and financial advice becomes essential.

As pension schemes have become more commoditised by market forces and legislation, there is less of an argument for consolidation before retirement. Older schemes are a special case as it is almost impossible to generalise; some are a lost cause and should be consolidated without delay; others are redeemed by guaranteed benefits and a third group might need to be held to maturity to get the best from them.

If you have a number of pension schemes, it would be worth having a critical look at them and deciding if you should seek financial advice. If you are within a few years of retirement, make contact with an adviser well before the event as it is highly likely that each pension scheme will need to be considered in isolation to get the most from it – one size fits all is a recipe for disaster in this specialised environment.

If retirement is still a long way ahead, making the best of each scheme in turn will require you to explore the fund options for each scheme, test your attitude to investment risk and understand the scheme rules to make the best of your money. Sometimes, despite the cost, using an adviser is the cheapest option.

If you would like to know more about how we can help you plan and realise your financial goals then contact us at or call us on 01223 792 196.

The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.