Savers should "look before they leap" into consolidating their defined contribution (DC) pension pots, according to LCP's new paper 'Five reasons to consolidate your DC pensions — and five reasons to be careful'.

The downsides mentioned in the paper — loss of guaranteed annuity rates (GARs), loss of small pot privileges, loss of tax protections, risk of exit charges and lack of diversification — apply to most UK DC savers, according to the consultancy.

In light of this, the paper's authors, LCP partners Dan Mikulskis and Steve Webb, have urged savers to carefully weigh up the benefits of DC consolidation.

GARs, which promise an often attractive annuity rate compared with current market rates, are not always features that can be transferred into other pots, while other benefits, such as having the ability to access a fund before the proposed normal minimum pension age of 57 by 2028 could also be lost.

Placing all retirement savings into one vehicle could also mean that savers give up small pot privileges such as being able to access pots under £10,000 without triggering the money purchase annual allowance limit.

“Despite the attractions of pension consolidation, it is important to 'look before you leap’," commented Webb.

"Pension products may have attractive features, which can be lost if you transfer out as an individual. This could include access to more tax free cash, guarantees on the annuity rate you can secure, or even the right to access your pension at a certain age.

"Before consolidating you should make sure you know what you are giving up and weigh up the pros and cons before doing so”.

Nevertheless, the paper does point out some strong advantages that could be gained by amalgamating pension pots. These include lower charges, innovative investment approaches and a lower administrative burden.

Many pensions taken out before automatic enrolment (AE) will have much higher charges than charge-capped pensions under AE, according to the paper.

LCP estimated that even moving lifetime savings from a fund charging 1 per cent to one charging 0.75 per cent could result in a fund nearly £25,000 larger for someone on average earnings who contributes each year.

“From an investment point of view, your mix between growth assets and stable assets is likely to the biggest driver of your investment returns" said Webb's co-author and LCP partner Dan Mikulskis.

"But it is very hard to have the right strategy — to get this mix right — if your money is scattered across lots of different pensions, all with their own approach to investing your money.

"Consolidating can also dramatically reduce your costs, with old ‘legacy’ pensions often charging at least twice as much as more modern arrangements. Switching to low cost funds can add tens of thousands of pounds to your final pension pot at retirement”.

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