The Pros and Cons of Pension Consolidation

The Pros and Cons of Pension Consolidation

The Pros and Cons of Pension Consolidation

In recent years we have seen many changes concerning pension regulations which may impact your long-term income. The subject of pension consolidation is interesting, with several pros and cons depending on your scenario. Whether you decide to increase contributions, consolidate part or all of your pensions or make any other changes, it is essential to take professional financial advice.


Different types of pension

There are two main types of pension (three if you count the state pension), defined contribution and defined benefit, which have different characteristics. The basics are as follows:


Defined contribution pension

While the level of contributions is defined, there is no guarantee about the size of your pension pot on retirement. This is often referred to as a “money purchase” pension with retirement income dependent on market conditions.

Defined benefit pension

Often referred to as a “final salary” scheme, income in retirement is based upon your final salary and years of service. While you will still contribute to a defined benefit pension scheme, any shortfall in your pension income would be made up by your employer.


The benefits of consolidating your pensions

We will now look at the benefits of consolidating your pension, which can assist with long-term financial planning.


Investment performance

If you have several pension schemes, the chances are their investment performance will vary, often widely. Therefore, where applicable, consolidating your pension funds into one plan could significantly enhance long-term returns.


The level of charges will vary for different types of pension schemes, with some of the older plans often on less competitive rates. While charges should not be the primary driver for consolidation, there may be significant long-term cost savings on offer.


The average person today is expected to have around 12 jobs in their lifetime, which means, taking into account workplace pensions, they could have 12 different pension schemes. This could become an administrative nightmare with the potential to lose track of one or more pension plans. Therefore, consolidation can make life much easier from an organisational and management point of view.


The drawbacks of consolidating your pensions

In tandem with your financial adviser, it is essential to look at the broader picture concerning the potential consolidation of your pension funds. There are several issues to be aware of, such as:


Loss of defined benefits

Switching out of a defined benefit pension scheme, where your pension income is based on your final salary and years of service, can be counterproductive. Even if you could enhance your long-term pension pot through a SIPP or other similar product, there is a risk. Switching from a final salary scheme to a money purchase scheme is rarely advantageous, and advice should be taken at the earliest opportunity.

Reduced transfer value

Historically, many pensions were invested in With Profits funds, often subject to a market value reduction if transferred elsewhere. In reality, the deduction may be relatively small, but it is essential to take this into account when considering consolidating your plans. Some plans may have significant exit fees, although this is becoming less frequent as the market becomes more competitive.

Conditions of entitlement

Some pension funds have a protected pension age which may be less than the standard age today. There may be the opportunity to maintain this protected pension age upon transfer, but it is important to check the terms and conditions of the receiving administrator.


Seeking advice from a pension specialist

We have many retirement planning specialists at Cedar House Financial Services who can provide specific advice on pension transfers. While there is a legal/regulatory obligation to seek advice when transferring defined benefit assets of more than £30,000, it makes sense to seek advice for any pension transfer. As we have touched on above, there are many issues to consider before transferring assets.



The ongoing cost of living crisis has highlighted the long-term benefits of pension income and placed a focus on enhancing long-term income where possible. While there are a number of pros and cons to consider concerning pension transfers, it is crucial to take a proactive approach to your long-term assets. Your actions today could maximise the chances of enhancing your pension assets in the longer term. As you can see, there is much to consider, and you must take professional financial advice.

Posted in Pensions