I have built up five different pension schemes under different employments over the past 20 years. Three are worth less than £8,000 each. However, my main SIPP is worth considerably more, around £300,000.

My question is would I be better keeping these pensions separate and only taking them when I want to? Perhaps I should take them when my overall income is lower and I’m paying less tax?  Or would it be better for me to consolidate them into my main pension scheme?

Charlie

Rachel Vahey, AJ Bell Head of Public Policy, says:

Pension participation in the UK has increased massively over the last decade; in 2023, 22.3 million of us were paying into a pension plan. This is mainly thanks to automatic enrolment which means when you join a new employer you will probably be enrolled automatically into the pension scheme.

However, automatic enrolment also brings its challenges. Previously the Department for Work and Pensions has estimated employees work for 11 employers on average during their working life.  So, the result is many, like you, have built up numerous different pension plans in different places.

This can become a problem. It can create additional administration keeping track of different plans, but it can also prevent you seeing the whole picture of your total pension wealth and, maybe, deciding what to do with it.

So, there are good reasons why combining your pensions – moving everything into one place – might work for you. If you do combine your pensions, you don’t have to take it all at once, you can take just a slice at a time whenever you want, and that can help you manage the amount of income tax you pay.

KEY THINGS TO CONSIDER

Before you rush out to combine pensions it would be good to run through a check list:

• Some pension plans apply exit penalties so if that’s the case think hard before transferring.
• Other plans can offer valuable benefits such as a guaranteed price if you buy an annuity. And a defined benefit pension scheme can be extremely valuable. Most people will need to get regulated financial advice before moving it.
• If your employer is paying into your pension, then just make sure that moving it won’t stop these contributions.

You may also want to compare your current pensions with the one you want to transfer to. For example, charges can vary so check what the difference is. And look at your investments – both how they have been performing and the cost of them, but also the range on offer.

Even if the receiving pension is more expensive you may still want to move to it if it offers you more value, say through a better service, but you need to think this through.

You may also want to think about how you can take your pension. For example, if you want to take drawdown – where you take your tax-free cash and then keep the rest invested to draw an income from when you want – it may make sense to combine your pensions together.

If you don’t combine your pensions, you could pick and choose which plan to access and when. But if the plan doesn’t offer flexible access, you may be forced into taking the whole value of the plan and it could be a smaller or larger amount than would work better for you in a particular tax year.  

A TECHNICAL POINT WORTH UNDERSTANDING

Finally, there’s one other technical point to mention, but, for some, it’s one worth understanding.

When you take your pension, you can usually take up to 25% of it as a tax-free lump sum. Over the course of your life most people can take up to £268,275 as tax-free lump sums – this is called the lump sum allowance or LSA for short.

However, if you cash in a small (defined contribution) pension pot worth less than £10,000, then the tax-free lump sum you receive from that wouldn’t count towards your LSA. So those people who have large amounts of pension wealth, who think they may bust their LSA, may want to keep very small pots separate as the tax-free cash from them won’t count towards that limit. If so, there are a few rules to be aware of. You can only cash in three pension plans on this basis, and you have to take the whole of the pension pot from one scheme.

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