By cutting duplicate charges, consolidation could help savers keep more of their money. The government says this could boost the average worker’s retirement savings by around £1,000.
The plans, announced last week by pensions minister Torsten Bell, have been welcomed by Which?
Here, we outline what the changes will mean for you and how you can best keep track of your pensions.
What is happening with small pension pots?
The aim is to automatically consolidate individuals’ small pensions without them having to give permission. Pension savers will be able to opt out if they want to and consolidate their money in a plan that they choose themselves if they wish.
A ‘multiple default consolidator’ system, now officially known as the Small Pots Data Platform, will mean dividing small pots among various nominated companies or ‘consolidators’.
These consolidator schemes will need to meet certain standards to ensure they offer good value for money and can manage people’s savings effectively.
The proposed date for the small pot transfers to begin is 2030.
Find out more:Why are the changes needed?
The average person will have around 11 different jobs over their lifetime, according to the Association of British Insurers (ABI). This will usually mean becoming a member of several pension schemes.
This can mean having many small pension pots which can be difficult to manage. There are an estimated 13m pensions worth less than £1,000 in the system and this can cause problems for people’s retirement planning.
Some providers also charge flat fees, which can gradually reduce the value of smaller pots. Consolidation could reduce the number of fees and make pensions more cost-effective.
The government says the average worker could be £1,000 better off, though how much you benefit will depend on your existing pension arrangements and the charges applied.
Rocio Concha, Which? director of policy and advocacy, welcomed the announcement: ‘Which? called for the consolidation of small pots under £1,000 before the election, so we are delighted that the government is committing to doing this – a move that will provide greater value for savers and support them to keep track of their pensions.
‘Which? looks forward to working with the government to ensure the pension system is fit for the modern age.’
Find out more:How to track down lost pensions
Keeping track of all our pensions can be tricky. As we’ve outlined, a combination of people having more jobs and automatic enrolment into workplace pensions is behind the increasing number of ‘lost’ pensions.
The Pension Policy Institute estimates that 3.3m pension pots are lost in the UK, worth £31.1bn in total.
The government's Pension Tracing Service searches a database of over 200,000 pension schemes to find contact details for your provider.
You’ll need the name of an employer or pension provider to use it, but it won’t tell you how much your pension is worth.
Some pension providers also offer their own tracing services. These tools include:
Find out more:What to consider before consolidating
The new measures will only impact the smallest pensions. People with larger pensions, and those who actively want to choose their pension provider, can still consolidate their pension pots themselves.
The main reasons to switch will be to reduce the charges on your scheme, particularly if you have an older plan with high fees, or to access different investment options.
Many workplace schemes don’t offer a full range of retirement income options or they restrict your investments to the firm’s own in-house funds.
The other main strategy is to consolidate all your retirement savings in one place, perhaps to make managing your pensions easier.
Unlike other types of private pensions, where you usually rely on the scheme provider to decide where your retirement savings should be invested, a Sipp means that you take on the responsibility for choosing and managing your own investments.
If you decide to go ahead, you’ll need to contact the provider you want to move to. It will give you an application form to fill in and will manage the transfer on your behalf.
Find out more:Could you have one pension for life?
Another initiative from the government could eventually solve the problem of too many small pots at source.
The proposal is for a ‘lifetime pot or provider’ which would see us having just one pension scheme that we choose at the start of our career.
The idea proposes that employees choose their preferred pension scheme and then their current employer, as well as any future employers, pay into one retirement fund.
This would make it easier to see how much you have saved for retirement in total and make sure that small pots didn’t go astray.
The lifetime pot may be a way off, but pension dashboards should improve matters in the meantime. Dashboards will allow savers to see all their pensions in one place online, potentially reuniting them with lost retirement savings.
The pension dashboards are expected to be launched to the public in late 2026, although there have already been several delays.
source https://www.which.co.uk/news/article/new-rules-for-pension-pots-worth-under-1000-what-you-need-to-know-auc8r0y8l1OS