Michelle Cracknell: Is pensions consolidation always the right choice?


Employers have to provide a workplace pension and, with the average person having 11 jobs in their lifetime, according to the Department for Work and Pensions (DWP), this could lead to millions of dormant or lost pension pots. Keeping track of multiple pensions is hard and will continue to be so until there is a dashboard.

So, what can people do? It is better not to have a lost pension, so that leads to the answer for employees to consolidate as they move jobs, so that they can keep tabs on their money. There may also be an economical argument to consolidate; pensions have reduced in cost and some schemes offer discounts for large pots. It could be worthwhile for an employee to consolidate their pension to get a newer version that offers lower charges.

But stop: there are a number of reasons why it may be better for employees to keep their pensions separate.

Firstly, there is the small pension pot rule, where an individual can cash in three small pensions, each less than £10,000, and does not need to include these funds in their lifetime allowance calculation. It also does not affect the annual allowance, and the tax deducted on three-quarters of the pot is initially at the basic rate.

Secondly, there is also the possibility that an employee has a pension pot in an occupational scheme where the employer meets some, or all, of the charges, so the overall charges being paid by their pension pot are very low. It may be that this workplace scheme will not accept pots from other sources, especially if the individual has left that employment. Consolidation may, therefore, see their charges increase.

Finally, it may be better to wait until age 55 if there are exit charges on the pension pot. At age 55, the exit charge will be capped at 1%, which may be a significant saving.

Like so many issues in pensions, it is not a simple answer. If the pension dashboard drives consolidation, will it offer the guidance to ensure that it is in employees’ best interests?

Michelle Cracknell is a governor of the Pensions Policy Institute (PPI)