Pensions minister Torsten Bell has set out Government plans to consolidate 13 million small pension pots worth £1,000 or less.
At present, many people have multiple small pensions rather than one combined pot. It has been a long standing problem with the UK pensions system, caused by pensions being tied to specific jobs rather than being for entire industries or sectors, as is the case in other parts of the world.
People switching jobs more frequently and automatic enrolment into workplace pensions has driven a climb in the number of these small pots scattered around different providers.
The situation complicates the work of financial advisers as they attempt to quantify a person’s assets and investment exposure.
A framework setting out the rules a scheme would need to follow to become a consolidator scheme will be published. To support the process, a ‘Small Pots Data Platform’ will be rolled out to identify and source the pension pots that could be consolidated.
There will also be ‘safeguards’ for savers whose pension pots would be consolidated which include a member opt-out option.
See also: Eyes on AI as investors look for clues on market recovery
Bell said: “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.”
Rachel Vahey, head of public policy at AJ Bell, said “Automatic enrolment is one of the big public policy success stories of our time. But it’s not without its flaws. People start a pension when they join an employer, but when they switch employer they often leave their old pension behind, neglected and unloved. This has created a plethora of small pension pots which are easily forgotten.
See also: Former Hargreaves veteran Lee Gardhouse returns to industry with Moai Wealth
“Confirmation that government will press ahead with proposals to automatically combine the very smallest lost workplace pension pots worth £1,000 or less will help to address the issue. Although there is much more still to be done.
“At the centre of these proposals is the ability to automatically consolidate individuals’ pensions without them having to give permission,” she continued. “But this doesn’t have to be a foregone conclusion. Pension savers can opt out if they want to and consolidate their pensions in a plan that they choose themselves, offering them the features they value.”
Jon Greer, head of retirement policy at Quilter, added: “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.
See also: Professional investors targeting risk-on assets to meet retirement needs
“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.
“The government is understandably keen to ensure the market works best for savers, shaking up workplace pensions to make them more efficient. They have chosen a ‘multiple default consolidator’ model, which involves dividing small pots among multiple consolidators.
“This approach could reduce the administrative burden, as many providers already manage a high concentration of small pots.”
