Millions of people should find it easier to track their pension savings – and could get a boost of £1,000 into their retirement nest egg – under government plans to consolidate small workplace pension pots.
In reforms unveiled by the pensions minister today (24 April), the government will create a small pensions pot consolidator. Each individual’s small pots will be brought together into one pension scheme that is certified as delivering good value to savers.
There are now 13 million of these small pots, holding £1,000 or less, with the number increasing by around one million a year, according to government estimates.
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Individuals can choose to opt out of the scheme, but the move is set to boost retirement savings for the average worker by around £1,000, and save pension businesses £225 million a year in unnecessary admin costs, according to government calculations.
Pensions minister Torsten Bell says: “There are now more small pension pots in the UK than pensioners – raising costs and hassle for workers trying to track their savings.
“We will automatically bring together people’s small pots into one high performing pension, reducing costs as well as hassle for savers.”
How consolidating small pension pots can save on fees
The problem of what to do with small pension pots has been growing since the introduction of auto-enrolment in 2012, when it became law for employers to offer workers a pension.
As people move from job to job over their working lives, they accumulate a number of small pension pots that can be difficult to keep track of, and having lots of small pots all attracting fees can be an expensive way to save for retirement.
Jon Greer, head of retirement policy at Quilter, says: “If you have multiple small pots, you could be paying unnecessary administrative costs. Additionally, some providers may offset their losses by charging higher fees on larger pension pots, meaning you could be cross-subsidising the costs associated with managing smaller pots.
“Consolidating your small pots can save money and simplify your retirement planning. It reduces the administrative burden of managing multiple pots and minimises the chance of lost pension pots.”
However, today’s announcements only apply to pensions used for automatic enrolment, which, broadly speaking, means most private sector workplace pensions set up since 2013.
As Rachel Vahey, head of public policy at AJ Bell, points out: “That means those with older pension arrangements are outside the scope of the exercise and should still be thinking about whether they wish to take steps to consolidate their pension pots themselves.”
What the IFS says about small pension pots
Today’s announcement by the government follows calls for it to automatically consolidate small pension pots to avoid them getting lost from the Institute for Fiscal Studies (IFS) in a report in February.
According to IFS figures there are 20 million small pension pots worth less than £10,000 that are not being contributed to, totalling almost £30 billion. Over half of these pension pots – 12.1 million – are worth less than £1,000.
The think tank warned these figures have grown rapidly in recent years, and “the proliferation of these deferred small pension pots is burdensome for both savers and pension providers”.
“Deferred” means you no longer actively contribute but hope to draw from it when you retire.
If you forget about your pension, you won’t be aware of the fees or how it’s performing, and if you lose it completely, you’ll miss out on pension benefits when you retire.
The IFS also says there are merits of going further than just consolidating small pots, and moving towards a system where people end up with one defined contribution pension pot, or only a very small number of these, as they approach retirement.
Lisa Picardo, chief business officer UK of PensionBee, a consolidator, says small pot consolidation, particularly for micro pots, can be “highly beneficial”.
She notes: “Our own research shows that nearly one in five UK adults feel certain or believe they have lost a pension pot, equating to approximately 8.8 million individuals. By making consolidation the default for micro pots, we can help savers take control of their retirement savings, reducing the likelihood of lost pensions while also improving investment outcomes.”
What to do if you have a small pension pot
If you have small pension pots from a previous job – around £10,000 or less – then it may make sense to consolidate them.
You could consolidate it into a current workplace pension, where costs could be lower.
Benefits to consolidating your pension include: your pension is easier to manage and track, you may lower your fees, gain wider investment choice and get better value when buying an annuity.
However there are things to think about before you consolidate your pension, according to Steve Webb, former pensions minister and partner at consulting firm LCP.
“There are some cases where consolidation may not be a good idea, including where old pensions have valuable features (for example, guaranteed annuity rates) that are not available with new pensions.
“There are also ‘small pots privileges’ which could be lost if you consolidate – for example, a pot under £10,000 can be cashed out without triggering the ‘money purchase annual allowance’, but a pot of £15,000 cannot. Consolidation should therefore be done carefully and thoughtfully and not as a knee-jerk response.”
Webb added that for anyone thinking about consolidation, they should shop around to get the best deal and make sure the pension scheme suits their needs.
He says: “If the current workplace pension is not suitable or not available, do not just go with whoever has the best TV advertising campaign.”
Of course, if you have a defined benefit pension – which includes final salary plans – then you should probably leave it where it is. Though these are not available to most of the workforce today, they offer valuable, guaranteed benefits.
If you are unsure about what to do with a defined benefit pension fund, it is always a good idea to seek financial advice before taking any action.
How to track down your small pension pots
One of the biggest problems with having loads of small pots is that you are likely to lose track. This is often done when you move home and forget to update your details with past providers.
An estimated £31 billion sits in “lost” pensions. The average size of a lost retirement fund is £9,470, according to the Pensions Policy Institute.
If you think you may have had a pension at a previous job but are not sure where it is held, you can get in touch with your old employer and simply ask for the details. Then, contact the pension fund and ask for an updated statement and consider if it is worth consolidating.
If you are unable to trace your old pension, you can also use the government’s Pension Tracing Service via gov.uk. However, this isn’t a speedy option and it may take some time to track down old pensions, so it may be worth going through old paperwork to see if you can find the details yourself first.
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