Five issues to consider before consolidating pension pots

Industry changes have made it natural to want to ‘tidy things up’ into one pot – but is it a good idea?

Click on the gallery below to find out why Royal London’s Steve Webb believes you should seek advice first.

Lost privileges

Two key developments in the pensions space may lead millions of savers to consider consolidating multiple smaller pension pots into a single, larger one.

Automatic enrolment into workplace pensions potentially gives workers a separate new pension each time they change job; while the pensions dashboard will enable people to see all the different retirement pots they have built up over their life in a single place.

In both cases, there will be a natural tendency to want to ‘tidy things up’ by consolidating small pensions in one larger pot.

But Royal London director of policy Steve Webb has identified ‘five good reasons’ to think twice before doing so:

1. 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% 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.

‘A day’ was 6 April 2006, when the UK government brought in rules to simplify how pensions are governed.