Before making a decision on combining pensions, you may wish to consider the investment choices you could have with your new pension. Have a look at fund factsheets and key investor documents to make sure you’re happy with the options available. You can usually find these within your pension account.
If you choose to combine your pension pots, remember the value of your pension pot can fall as well as rise and isn't guaranteed. The final value of your pension pot, when you come to take benefits, could be less than has been paid in.
Any new investment funds you move your pension pots into will have their own set of risks, which will be detailed in the fund information available to you. There’s no guarantee that by combining your pensions, overall investment performance will improve.
Does your scheme have a protected pension age?
In most circumstances, you can access your pension benefits from the minimum pension age, which is currently 55, unless you have a lower protected pension age (PPA).
However, the government is increasing the normal minimum pension age to 57 from 6 April 2028. Your ability to access your pension benefits before the age of 57 may be protected in your current scheme if it has a PPA, and could be lost if you transfer to another pension scheme. Typically, a PPA rule might already be included in a pension that you joined before 6 April 2006.
If being able to access your pension from age 55 rather than 57 is important to you, please consider getting financial advice before combining your pension pots, to make sure it's right for your circumstances.
Small pot options
A pension pot is classed as a small pot when it’s no more than £10,000. Small pension pots can be useful for tax planning because they allow you to take benefits without being affected by the lifetime allowance or the money purchase annual allowance for pension savings.
Until 5 April 2023, the lifetime allowance was the amount you could save in your pension fund over your lifetime without attracting a tax charge. From 6 April 2023, the lifetime allowance still applies but the tax charge will be abolished – any savings you have that exceed the lifetime allowance will be taxed at your marginal rate.
Provided you’ve reached your normal minimum pension age, you can take up to three small pots of up to £10,000. These aren’t tested against the lifetime allowance and 25% will be paid tax-free, while the remainder will be taxed at your marginal rate of tax.
If you have benefits that are close to the lifetime allowance, it may be worth considering using small pots to benefit from the tax-free element. If you don’t use up your small pots and end up with pension savings that exceed the lifetime allowance when you take your benefits in the 2023/24 tax year, you could pay tax at your marginal rate on all of the excess funds.