Costly pension ‘merging’ error could wipe £10,000s off your retirement pot and force you to work for longer

PENSIONERS who are worried about an inheritance tax raid are being warned not to make a costly mistake that could see them lose thousands of pounds in retirement. Pensions will be brought into the scope of inheritance tax from next April as part of plans announced by former Chancellor Rachel Reeves in the 2024 Budget. The rule change has caused a larger number of savers to consolidate their pension pots to make it easier for their family to deal with their affairs after they’ve passed away. Pension consolidation means you bring multiple pensions into one place. Sign up for the Money newsletter Thank you! Adam Cole, retirement specialist at Quilter, said: “The proposed inheritance tax changes are likely prompting more people to review pension arrangements that may have been left untouched for years.” It is estimated that 49,000 estates will be affected each year after the rule change comes into force. In order to pay any inheritance tax due your loved ones will need to track down every pension pot you have before calculating and paying a tax bill. A typical worker has around 11 jobs during their career, which means they are likely to end up with multiple pension pots. But while consolidation can simplify your finances, it could see you lose out on thousands of pounds in retirement. Jemma Slingo, pensions and investment expert at Fidelity International, said: “There are some major pitfalls to avoid. Some pension schemes offer great benefits that you could lose if you transfer. Most read in Money “Some pension providers also charge exit fees. You should check for these if you’re planning to transfer out of your current pension, as they could impact its future value.” While exit fees may seem small they can significantly eat away at your nest egg. For example, a 1% charge on a £100,000 pot would cost you £1,000. It’s important to check for these if you’re planning to transfer out of your current pension as they can affect its future value. Meanwhile, if you have a defined benefit pension then you need to be even more careful. Defined benefit pensions provide a guaranteed income for life, so transferring out could mean you give up valuable benefits. Jemma explains: “In many cases, keeping the pension where it is will be the better option, and you’ll generally need to take financial advice before transferring.” Meanwhile, if you leave a pension scheme then you may not be able to access your pot until later into your retirement. Adam explains: “Older pension schemes can contain benefits that may be lost on transfer, including protected pension ages allowing access to savings earlier than the normal minimum pension age.” The age at which you can claim the state pension is set to rise to 67 in April 2028. You can typically access your private pension ten years before you reach the state pension age, which is called the normal minimum pension age. This is also set to rise to 57 in April 2028 but you may still be able to access your pot at 55 or 56 if you are part of certain pension schemes. You could lose this right if you combine your pots. Some pension providers also offer guaranteed rates if you decide to exchange your pension pot for an annuity, which is called a Guaranteed Annuity Rate. An annuity gives you a guaranteed income for life in exchange for all or a portion of your pension pot. A Guaranteed Annuity Rate is valuable as it means the amount of income you could get will not change if rates go on to fall or the market drops. Providers typically offer rates of between 9% and 11%, which is often higher than standard open-market rates, which average around 7% to 8% for a 65-year-old, according to Unbiased. These changes are irreversible, so it’s important to consider the benefits and drawbacks before you make a decision. Speak to a financial advisor if you are unsure about what is best for your circumstances. Comment now