The Department for Work and Pensions (DWP) has launched a consultation setting out how a new system for automatically consolidating small pension pots could work, aiming to have the scheme in place by 2030.
According to the DWP, there are currently more than 13m workplace pension pots worth less than £1,000. Between them, they contain over £4bn in retirement savings. A further 1m pension pots are created each year.
Here, Which? takes a look at the DWP's initial plans and what this could mean for your retirement savings, alongside highlighting whether you should consolidate your pension pots now or wait.
What consolidation could mean for your pensions
As this is a consultation, the government is looking for responses to its initial ideas for the consolidation plans. This means they could be subject to change depending on the responses.
Here is what the DWP has initially proposed:
Which pensions will be automatically moved?
The pension pots that will be targeted as part of the plan will be those that have been created since 'automatic enrolment' was introduced on 1 October 2012. Specifically, it will target pots held in defined contribution pensions.
Alongside this, the money must be sitting in a charge-capped 'default fund'. This is the standard investment plan you are automatically put into if you haven't actively chosen your own investments, and 'charge-capped' simply means there is a legal limit on the fees you can be charged.
The initial rollout will target small, inactive pensions which:
If your old pension is held in a very small scheme – this is classed as a scheme with 100 members or fewer – or a scheme currently in the process of closing down, it will be initially exempt from automatic consolidation.
When the scheme is officially implemented in 2030, the government estimates that around 20m pension pots will fall into the scope.
Find out more:What if you don't want your pension moved?
The DWP also wants to implement strong protections for consumers, although you'll still need to take action to opt out.
Under the plans, if you're happy with your smaller pots being combined but you don't want to be assigned to the government's 'default' consolidator scheme, you don't have to be. You will be allowed to actively select an alternative consolidator that better fits your personal financial goals.
Alongside this, individuals will be notified when their pension is set to be moved, with the framework requiring schemes to formally communicate your options to you before any automatic transfer takes place.
Finally, if you prefer to keep your small £1,000-or-less pension exactly where it is – as it has specific features you like, or you are simply comfortable with your current provider – you will have the right to opt out entirely.
Find out more:What safeguards will be in place for your pensions?
The government will introduce a formal authorisation process for Default Consolidator pension schemes to prevent savers' money being placed in underperforming, high-cost pension funds.
This approved consolidator list will include both master trusts (multi-employer pension schemes run by a board of trustees, such as Nest) and contract-based schemes (pensions run directly by commercial providers, such as large insurance companies).
Alongside this, authorised providers will need to prove they have the scale and security needed to manage the pension pots safely.
To make sure you don't lose valuable built-in perks, the government's proposed framework also includes specific safeguards that will exempt certain pots from being automatically transferred – such as those that carry a protected pension age or a guaranteed annuity rate
Find out more:How will the system work?
Instead of creating one massive central database to store everyone’s sensitive pension data, the government is proposing a hybrid model.
Under this proposed model, individual pension companies will keep your information on their own secure systems, but they will communicate directly with each other.
To make sure your money isn't accidentally sent to someone with the same name, providers will use standard data checks using details such as your National Insurance number, name, and date of birth.
The government estimates that making the process automatic will save the pension industry around £240m a year in administration costs.
Find out more:Will your employer need to do anything?
As workplace pensions are set up through employers, the proposals highlight what will be required from them when the new system comes in.
Employers are already legally obligated to participate in auto-enrolment, but under the new proposals, employers will need to provide accurate employee data to pension providers. This will allow the automated system to identify an employee's active workplace pension and consolidate their previous pension pots into the current scheme.
The rules will also integrate the new background consolidation process with existing auto-enrolment duties, so that pension records update automatically when a worker changes jobs.
The government intends for these requirements to be digital to minimise the administrative burden on businesses. It also aims to remove any need for manual processing by HR or payroll departments.
Find out more:Should you consolidate your pensions now – or wait?
So, with the consolidation ball now rolling, is it worth waiting until the new system is in place, or should you act now if you have multiple pension pots?
Here are a few reasons to consider consolidating sooner, alongside a few reasons why you might want to hold off:
6 reasons to consolidate sooner
Stop multiplying fees Simplify admin Take control of your investments Take advantage of an age 55 protection Get better tech Improve your returns6 reasons to hold off
You could lose an age 55 protection You might give up a great workplace scheme You could pay for options you don't need The cost of waiting is small You could lose valuable guarantees You could be hit with exit fees Find out more:source https://www.which.co.uk/news/article/got-old-pension-pots-should-you-consolidate-them-now-or-wait-until-2030-ayrhq9U8F2sS