Over two million small deferred pension pots are created each year as workers shift from one job to another at increasing rates.
If you have had several jobs, the chances are you have a deferred pension pot - this is a pension you no longer actively contribute to but hope to draw from when you retire. Thanks to auto-enrolment, deferred pension pots are now fairly common but not necessarily right for consumers as they can cost you money and limit growth.
Small pension pots can also easily be lost, meaning you could miss out on pension benefits when you retire.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Most people take little action or are unaware of the costs associated with keeping several small pension pots, and consolidating them could make good sense.
The Department for Work and Pensions (DWP) has been exploring how to help employees better manage small pension pots and their costs. It proposes that “default consolidators” are created to sweep up small deferred pension pots worth less than £1,000. This would be an automatic system where deferred pots go off to a third-party consolidator.
Following a consultation, the DWP said: "We have concluded that the multiple default consolidator model is the optimum approach to addressing the deferred small pots challenge and has the potential to provide greater net benefits to members, ensuring that members eligible deferred pots are consolidated into one scheme.”
This model would aim to consolidate an estimated 12 million small pots that are collectively worth £4 billion.
Pensions minister Laura Trott said a longer-term solution could be an Australian-style ‘pot for life’ system. She said: "In the longer-term, a simpler system of workplace pension saving could emerge to deal with the issue that new pension pots are created each time someone starts a new job, for example, a lifetime provider model with each saver stapled to a ‘pot for life’, which may go further to solving this for existing and future pots.”
The DWP is now exploring how a default consolidator framework would work, and what sort of choice savers would have over whether their small pension pots are merged. Its “Ending the proliferation of deferred small pension pots” consolidation will finish in September.
But for anyone who has several small pension pots right now and wants to do something about it, there are things you can do to maximise your pension savings and keep costs low.
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 products suit their needs.
“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, then you should probably leave it where it is. Though these are not available to most of the workforce today, anyone with one will have guaranteed benefits and they are considered ‘gold dust.’
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.
Around £26.6bn sits in ‘lost’ pensions that have been forgotten about as people switch jobs frequently.
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.
Kalpana is an award-winning journalist with extensive experience in financial journalism. She is also the author of Invest Now: The Simple Guide to Boosting Your Finances (Heligo) and children's money book Get to Know Money (DK Books).
Her work includes writing for a number of media outlets, from national papers, magazines to books.
She has written for national papers and well-known women’s lifestyle and luxury titles. She was finance editor for Cosmopolitan, Good Housekeeping, Red and Prima.
She started her career at the Financial Times group, covering pensions and investments.
As a money expert, Kalpana is a regular guest on TV and radio – appearances include BBC One’s Morning Live, ITV’s Eat Well, Save Well, Sky News and more. She was also the resident money expert for the BBC Money 101 podcast .
Kalpana writes a monthly money column for Ideal Home and a weekly one for Woman magazine, alongside a monthly 'Ask Kalpana' column for Woman magazine.
Kalpana also often speaks at events. She is passionate about helping people be better with their money; her particular passion is to educate more people about getting started with investing the right way and promoting financial education.
Lloyds, Halifax and Bank of Scotland to shut another 45 branches
Lloyds Banking Group, which includes Halifax and Bank of Scotland, is set to close a further 45 branches in 2024 - find out if a branch near you is closing.
By Vaishali Varu Published
US stock trading app Robinhood launches in the UK
The low-cost trading platform has opened another waiting list for British investors - following two failed attempts to launch in this country - and is hoping to be fully operational next year.
By Ruth Emery Published
NatWest-owned Ulster bank boosts easy access savings rate to 5.2%
Rates on easy access savings accounts have hit over 5%, with Ulster Bank now giving savers the chance to earn 5.2% on their cash savings. We have all the details.
By Marc Shoffman Published
Moneybox raises market-leading cash ISA to 5%
Savings and investing app MoneyBox has boosted the rate on its cash ISA again, hiking it from 4.75% to 5% making it one of top rates. We have all the details.
By Ruth Emery Published
October NS&I Premium Bonds winners - check now to see what you won
NS&I Premium Bonds holders can check now to see if they have won a prize this month. We explain how to check your premium bonds
By Kalpana Fitzpatrick Published
October’s NS&I Premium Bond winners revealed - have you scooped £1 million?
Two lucky NS&I Premium Bond winners are now millionaires this October. Find out here you are one of them
By Kalpana Fitzpatrick Published
The best packaged bank accounts
Advice Packaged bank accounts can offer great value with useful additional perks – but get it wrong and you could be out of pocket
By Tom Higgins Published
Energy bills to fall 7% under new price cap
Energy bills could fall by an average 7% from October under the new Energy Price cap announced today. We explain what the new cap mean for you and when it will come into play
By Pedro Gonçalves Published
Bank of Baroda closes doors to UK retail banking
After almost 70 years of operating in the UK, one of India’s largest bank is shutting up shop in the UK retail banking market. We explain everything you need to know if you have savings or a current account with Bank of Baroda
By Vaishali Varu Published
The best options to earn cashback on spending
From credit cards and current accounts to cashback websites, there are plenty of ways to earn cashback on the money you spend.
By John Fitzsimons Published