Why it's worth tidying up old workplace pensions

Auto-enrolment means almost everyone in work now has a pension, and every time you change employer you tend to leave a pot behind. Over a working life of 40 years, it is completely normal to end up with five, six or more small schemes scattered across different providers. Each one sends its own annual statement, each one has its own login, and each one quietly takes its charges. It is easy to lose track of what you actually have.

Consolidating — moving those old pots into a single pension — is mostly about visibility. One statement, one set of charges, one place to check your investment mix and one place to update your nominated beneficiaries. If you are juggling a family budget, that simplicity has real value: fewer letters to open, fewer things to forget, fewer nasty surprises at retirement.

But it is not automatically the right move for everyone. Some old schemes hold benefits you cannot get back once they are gone.

What consolidating actually involves

You are not merging pension providers; you are transferring the value of an old plan into another one. That could be the workplace scheme you pay into now, or a personal pension you set up yourself.

The mechanics are usually straightforward:

• Contact the provider you want to use and ask them to accept a transfer in.
• They will send you forms, or you may be able to do it online.
• The old scheme pays out the cash value and the new one receives it. Most transfers take four to eight weeks.
• You may need to sign a discharge form confirming you understand what you are giving up.

One firm rule: leave your current workplace pension alone while your employer is still contributing to it. Moving money out mid-employment can mean losing employer contributions, and there is no upside to doing it.

Benefits you could lose — check before you move anything

This is where consolidation goes wrong. Before you sign anything, ask the administrator of every old scheme for a full breakdown of what that pot contains.

• Guaranteed annuity rates. Some older personal pensions promise an income at retirement that is far better than anything available on the open market today. Transfer out and the guarantee disappears.
• Defined benefit (final salary) promises. If a scheme promises an income based on your salary and years of service, that is a very different thing from a pot of money. Transfers out of these worth more than £30,000 legally require you to take regulated advice first — and for most people the answer is no.
• Protected pension age. Some schemes let you take money earlier than the usual age without penalty. A new scheme will rarely replicate that.
• Enhanced tax-free cash. A few old schemes hold a right to more than the standard 25% tax-free lump sum.
• Death benefits. Schemes pay out differently if you die before or after taking benefits. Compare the small print carefully, especially if you have children.

If you hold any of these, pay for proper regulated advice before you decide. It is money well spent.

Charges, exit fees and the small print

Charges matter more than most people expect. A difference of 0.5% a year on a £30,000 pot sounds trivial, but it compounds into thousands over a couple of decades. Compare the annual management charge, plus any platform fee, fund fee or trading cost, on both the old and the new scheme.

Watch for exit fees too. Older schemes sometimes charge a percentage of your pot, or apply a market value reduction when you leave. There are caps on early exit charges for many schemes once you reach your scheme's normal pension age, but they do not apply universally, so always ask the question in writing and keep the reply.

Also check that the receiving scheme is authorised by the financial regulator, and what its rules are if you later want to move the money again.

How to do it in practice

A sensible order of operations:

• Use the government's free pension tracing service to find pots you have lost track of — you only need the employer's name.
• List every scheme, with its current value, charges and key benefits.
• Read the latest annual statement and the scheme booklet, or ring the administrator.
• Choose the destination. Your current employer's scheme is often the cheapest, because the employer negotiates the charges on everyone's behalf.
• Transfer the simple, low-value, no-frills pots first and leave the complicated ones for advice.
• Keep a record of every transfer — dates, reference numbers, amounts — in one file.

Free, impartial guidance is available from the government's pensions guidance service for anyone aged 50 or over. It will not recommend a product, but it will help you ask the right questions before you commit.

When leaving a pension where it is makes sense

Consolidation is a tool, not a rule. Leave a pot alone if it holds guaranteed benefits, if its charges are lower than anything you can access now, if you are close to retirement and happy with it, or if moving the money would trigger an unwanted tax charge.

It is also worth pausing during big life events. If you are midway through a divorce, a house purchase or a tax matter, keep the pension where it is until things settle — the paperwork will be easier and you will make a calmer decision.

For most people with a handful of small, plain defined contribution pots from jobs they left years ago, combining them into one well-charged scheme is a straightforward win. Just do the checking first. Ten minutes with an old scheme's paperwork can protect a retirement income you would never get back.