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Government sets out plans to automatically combine small pension pots
Workers with small pension pots could soon find their accounts combined into larger pots thanks to Government plans.
The Government has set out initial plans to combine the small pension pots – with a value of under £1,000 – into larger accounts in order to ensure people don’t lose track of their workplace pensions.
It says the reform will leave pension savers around £1,000 better off thanks to savings made to charges on the small pots.
The issue emerges when people work for companies for a short time and then move on. The company will open a workplace pension for them, but it isn’t added to for very long.
For people who move often, this can create a situation where they have a multitude of pensions with more than one company, with small amounts in them.
This is potentially expensive and inefficient. The Government now plans to automatically combine these small pots in order to save workers and the pensions industry money, time and complexity of managing so many accounts.
Minister for pensions Torsten Bell comments: “It’s great news that more people are saving for their retirement. But I want to make pension saving as simple and rewarding as possible.
“There are now more small pension pots in the UK than pensioners – raising costs and hassle for workers trying to track their savings. It also costs the pensions industry hundreds of millions of pounds every year.
“We will automatically bring together people’s small pots into one high performing pension, reducing costs as well as hassle for savers. In time this could boost the pension of an average earner by around £1,000 as part of our Plan for Change to put more money in people’s pockets.”
The Government says there are some 13 million small pension pots that will be affected by this reform. It currently costs the pensions sector £225 million a year to administer these pots – a highly wasteful situation.
Zoe Alexander, director of policy and advocacy at the Pensions and Lifetime Savings Association (PLSA), comments: “The accumulation of small pots creates unnecessary cost and complexity for savers and schemes alike. The PLSA has worked extensively with industry and the DWP to propose solutions and supports the model being proposed by the Government.
“We look forward to working on delivering the recommendations of the Small Pots Development Group and are pleased the Government is tackling this long-standing issue in the Pension Schemes Bill.”
The plans are in the initial stages. The scheme to transfer small pots is due to take effect from 2030.
Jon Greer, head of retirement policy at Quilter comments: “The Government’s move to prompt consolidation of small workplace pension pots is a much needed tidying up exercise, coming 13 years after the start of pensions auto enrolment.
|As working habits have evolved, people frequently change jobs, leaving behind a trail of small pension pots. This unintended consequence can make retirement saving complicated and may cost savers money.
“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. This reform is a significant step towards ensuring that workplace pensions work harder for savers.”
