While there are lots of good reasons to consolidate any smaller pension pots you may have, there can be drawbacks too. So, what are the pitfalls to watch out for?

Did you know that the average UK worker holds about nine to 11 jobs and works for around six different employers in their lifetime: time enough to build up a small collection of pension pots.

And financial advisors will often recommend consolidating some or all of them in order to reduce administration costs and/or move your hard-earned savings into schemes promising better returns or greater security of income.

But there is another side to the coin. And investment platform AJ Bell is warning savers to make sure they have looked at all of the ramifications before going down this route.

In fact, says Sarah Coles, their head of personal finance, there are seven questions you should ask to protect yourself from the potential pitfalls.

“Combining your pensions with a single provider can make a lot of sense. It’s easier to track and manage than having several pensions with different providers.

“It can help you make more joined-up decisions about taking income in retirement. You’re more likely to just cash in a small pot because it doesn’t seem worth converting it into an income, whereas combined with other pensions it could make a vital difference to the income you can afford to draw.

“You could also benefit from lower costs and charges, increased income flexibility and more investment choice by switching provider.”

Now for the downsides…

However, she goes on to say, there are seven questions to ask before doing so, to make sure that consolidation brings you all the potential benefits… without making any mistakes you might come to regret further down the line.

1          What kind of pension am I considering moving?

If you’re considering a switch from a defined contribution pension into another defined contribution pension, it’s easier to compare the costs and benefits.

If you’re thinking about a switch from defined benefit to defined contribution, you’re comparing very different beasts, and you’re giving up potentially valuable guarantees.

“It’s why,” she says, “in the vast majority of cases it’s not worth making this switch.”

2          Do I want to take advantage of small pot rules on any pensions?

If a defined contribution pension is worth less than £10,000, you can withdraw it all at any time after you reach the minimum pension age.

25% of it will be tax-free, 75% taxed as income. You can do this for up to three personal pensions and any number of workplace pensions.

“If withdrawing smaller pots in full works for your retirement plans,” says Sarah, “you may want to keep them in place. However, you need to weigh this up against the tax you’ll pay when you withdraw them, and ongoing charges between now and retirement, which can easily erode a small pot.”

 3         What are the charges in my current pensions?

The impact of reducing your pension charges can be significant – particularly over the long term.

4          What charges will I incur?

These charges can apply to pensions taken out before 2017 – so you need to calculate whether the difference in the ongoing charges will make up for this over the time you have left in the pension. “You should be able to find details of any exit penalties in the paperwork you got at the outset or any statements you have received,” adds Cole.

5          Is there a guaranteed annuity rate?

Many older pension schemes guarantee annuity rates well in excess of today’s offerings.

6          Is there a protected lump sum?

It may be that the amount you can take out tax-free is more than the current 25%.

Says Coles. “If you switch away you will typically lose this option, unless you can find someone else to transfer with as part of a block transfer – sometimes called a ‘buddy transfer’.”

7          What pension should I move to?

Not least, says Cole, check out what any potential new provider offers in the way of support, charges… and value for money.

“You may want plenty of investment choice and a provider who offers a ready-made option for those who are getting to grips with investments. A self-invested personal pension from an investment platform is likely to offer far more choice than a traditional pension provider,” she says.