If you’re employed, aged 22 or older, and earning more than £10,000, it’s likely you’re paying into a pension scheme.
And while in days gone by it was normal to find a job and stay there, many people today will have collected several pensions from leaving and starting different jobs with different employers.
Consolidating pensions can make sense – it’s easier to track and reduces the administrative burden of having pension pots in different places.
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But it’s not always as straightforward as this – and there are potential pitfalls.
Here are seven questions to ask yourself to make sure consolidation is right for you in the long term…
What kind of pension am I considering moving?
Sarah Coles, head of personal finance at investment platform AJ Bell, says pensions broadly come in “two flavours” – defined contribution and defined benefit.
Most modern pensions are defined contribution, where you – and your employer if it’s a workplace pension – pay a fixed sum each month.
That money is invested and grows over time, building up a pot that will pay you a retirement income through an annuity, drawdown or a lump sum.
Meanwhile, defined benefit pensions give you a retirement income based on your salary and how many years you’ve been in the pension scheme. They provide a regular income for life, usually in monthly payments.
Coles says it’s easier to weigh up the costs and benefits when combining one defined contribution pension with another, while it’s a “very different beast” when switching from defined benefit to defined contribution.
“You’re giving up incredibly valuable guarantees that would be far more expensive to replicate through a defined contribution scheme and an annuity. It’s why in the vast majority of cases it’s not worth making this switch,” she says.
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Do I want to take advantage of small pot rules on any pensions?
If a defined contribution pension is worth less than £10,000, it falls under what’s known as the “small pot rules”, Coles says.
One of the advantages is that, once you reach the minimum pension age, you may be able to cash in the entire pot without affecting some of the pension allowances that apply when accessing larger pensions.
Coles says this can be a useful reason to keep some small pension pots separate rather than consolidating them into a larger one.
However, anyone considering this should be aware that taking taxable income from a pension can trigger the money purchase annual allowance, reducing the amount that can be paid into pensions with tax relief each year from £60,000 to £10,000.