The XP is somewhat averaged out on merging.

You get best results merging a smaller, lower xp with a larger, higher xp unit. Sometimes you can create smaller, lower xp units from merging with a unit that is almost full, meaning the smaller unit doesn't suck xp. Try no to merge a larger, lower xp unit with a small, high xp unit unless you are out of options or you just don't care.

Not being able to retrain and upgrade sucks.

However, it is a very good reason to change your capitol to a place with a smith, so all your sons and sons of vassals recruits get upgrades. I'm not sure if field prmotions get any bonuses since they appear at the location of the battle. If a smith is present in the district, then maybe, but I honestly don't remember