Should you consolidate your pensions?

"The fewer pensions you have, the simpler life is," explains Tom McPhail, head of pensions research at Hargreaves Lansdown. "You want to spread your investment risk, but when it comes to admin more of this means more paperwork."

However, if you consolidate your pension you could miss out on valuable bonuses and guarantees tied to old policies, and in many cases will be hit with punitive costs.

The first thing to ask when thinking about consolidating pensions is whether you can actually do it. In most cases this should be easy. "If you are moving from a defined-contribution (DC) pension to another DC pension then there shouldn't be an issue, and in fact a good pension company will do the heavy lifting for you," says Mr McPhail. "However in the rare case of moving money into a defined-benefit (DB) pension you could come across hurdles. The only scheme you cannot move out of at the moment is Nest, the workplace pension scheme set up by the government. However that restriction will be lifted next year."

You should, however, think very hard about messing with DB schemes due to the life-long security they offer. "Don't transfer a DB pension unless you really do have compelling reasons to do so," says Mr McPhail.

And Patrick Connolly, certified financial planner at Chase de Vere, adds: "The default position is that you should leave DB pensions alone, although there might be exceptions for health reasons."

For the majority of workplace pension schemes, though, transferring should be relatively easy and could be wise. "If you are looking at DC pensions, including money-purchase schemes, group self-invested personal pensions (Sipps) and workplace pensions, it is worth considering whether you are able to move your old pensions because gone are the days when people stay in the same company for years," says Mr Connolly. "Having several pots is harder to administer, but holding everything in one place gives you a better understanding of what you've got and where it's invested."

Mr McPhail suggests considering what works for your individual circumstances. "A catalyst might be changing jobs," he says. "Does the scheme you are in today work for you in terms of how easy it is to manage and engage with, and the choices it offers? And how do you find out which company you are dealing with? If it's all positive then you might want to bring over previous pensions."

The easiest schemes to move between are DC schemes. "If you are moving into a new employer scheme, the vast majority are likely to be competitive contracts with low charges, and they now also have decent fund choices," says Mr Connolly.

Counting the cost of transfers

Cost and choice are both reasons to transfer old workplace pensions into your current workplace scheme. You might find that your current one is invested in better, lower-cost funds while your old workplace pensions remain invested in the most expensive share classes of funds, rather than newer, cheaper clean share classes. Higher fund fees weigh on your investment returns, so if you are in an expensive group of funds you might want to think about moving.

But if you do not want to consolidate it is worth checking whether your old policy will move you into a newer share class. "You could be invested in a fund that has five or six different share classes, each of which is subject to different charges," says Gary Smith, financial planner at Tilney Bestinvest. "Providers are under no obligation to move you."

In fact, to do so might breach the rules on advice, so it is up to you to work out what you are actually invested in. "You could also find that you are invested in expensive passive funds that do not offer you a good return for your money," adds Mr McPhail. "If you are the type of person who wants a choice of well-researched active managers who can add value then you need to make sure you are in a scheme that offers that. There are pensions charging 1 per cent for passive funds or charging active-management prices but not really delivering any kind of active management. Then there are schemes with a very small selection of funds available."

If you need greater flexibility in how you want to draw your pension or pass it to family members, you could also consider moving pension pots into your Sipp. A Sipp is likely to offer you the greatest flexibility in terms of fund choice and the new range of pension freedoms launched by the government. These include flexible drawdown and tax-free lump sums, which Sipps generally offer but older workplace schemes do not. Another benefit of new pension freedoms is how they are taxed after your death.

"One of the main reasons we see people moving pensions is inheritance tax (IHT)," says Mr Smith.

Former chancellor George Osborne introduced the ability to inherit a pension lump sum or keep it invested, known as successor drawdown. The second option enables a spouse for example inheriting a pension to keep it outside of their estate for IHT purposes by leaving it invested and taking benefits from it. But if you inherit a pension lump sum it will potentially count towards your estate and could incur IHT for the beneficiaries you pass it on to.

However bear in mind that workplace schemes are boosted by employer contributions and moving into a Sipp will mean giving up that bonus.

There are benefits to consolidating pensions, but there are also many cases when it isn't a good idea, particularly if transferring out of a scheme incurs exit penalties. "The main question here is can you move without it costing you," says Mr McPhail. "The cost could be a £25 administration fee or it could cost nothing. But you could also be hit with a 2 per cent charge, and some pensions charge you a percentage-based fee to reflect the upfront costs of setting up the scheme which have not yet been recouped. Those can be prohibitive."

Some old-style annuity contracts spread their charges over the life of a pension. If you transferred that pension over before your selected retirement age, the charges you would have continued to pay if you'd remained in the scheme would be rolled up and deducted from the transfer value of your fund.

The government has been consulting on reducing charges levied for pension transfers and this year the Financial Conduct Authority (FCA) proposed a cap of 1 per cent on exit fees for people cashing in their pensions before retirement age, along with a ban on exit fees for future contracts. The cap will come into force in March 2017. A 1 per cent charge could still be sizeable, though, and Mr Smith says: "We will need to see how the legislation is applied and the approach that existing providers take to this limit."

If you are keen to move your pension it is worth checking whether your new provider or platform will cover your exit fees, although this is not the norm.

Another key reason not to move an old pension pot is if it comes with valuable safeguards or guarantees which you would forego if you consolidated. The main add-ons and safeguards to look out for include life cover, guaranteed annuity rates and bonuses.

Section 32 pensions are likely to come with guaranteed minimum pension (GMP). Transferring one of these schemes could mean losing that entitlement, particularly if the value of your pot is lower than the guaranteed pension.

Other types of pension might offer guaranteed annuity rates (GARs) of between 8 and 10 per cent, which look highly appealing in today's low-yield environment. They could also offer the chance to take out more than 25 per cent tax-free cash on retirement or have life assurance attached.

Mr Smith says: "Older style pensions often have life cover attached, which would be lost if you transferred out."

It is also worth bearing in mind that some schemes with safeguards might demand you speak to a financial adviser before leaving. The cost of paying those fees could add up and make it not worthwhile.