- DWP call for evidence on ‘pot for life’ proposals closed on 24 January
- Call for evidence proposes a ‘lifetime provider model’ for workplace pensions
- Two phase approach would allow savers to first choose an automatic enrolment provider, with all automatic enrolment contributions then paid to that pension every time they move jobs
- Proposals could create pensions payroll nightmare for small companies
- AJ Bell urges government to focus on delivering on the existing Pensions Dashboard project, which was delayed last year
AJ Bell head of public policy Rachel Vahey comments on the Department for Work and Pensions (DWP) proposals for creating a ‘pot for life’, following the latest ‘call for evidence’, which closed this week:
“The basic premise behind these proposals is to allow individuals to choose a pension company and build a pot with that provider which then follows them throughout their working life.
“Government hope that will solve the issue of workers switching jobs through their career, building lots of small pensions along the way which they then struggle to keep track of.
“While this makes sense in theory, practically it is going to be very difficult to deliver. There will be a huge administrative burden on employers, who will need to be able to connect to multiple different pension schemes. A company with just five employees could find themselves paying into five different pension schemes, rather than the one they have to set up under current rules.
“For corner shops, independent retailers, restaurants and other small businesses, this threatens to become a pensions payroll nightmare.
“It is likely some form of clearing house will need to be developed to make these proposals work. But there is no plan in place for that at the moment, and it is impossible to determine if these proposals are workable until such a solution has at least been sketched out.
“Building the infrastructure to support this will also be expensive and will take significant time and effort to put in place. It isn’t clear whether that investment will lead to clear consumer benefit – will people really walk into their first job and feel they are equipped to choose a pension provider to last them the remainder of their career?
“In reality, most people will still ‘default’ into a scheme selected for them, with all future contributions going into that account when they change job. That’s all well and good if you’re lucky enough to end up in a pension that performs well, but if you draw the short straw you could end up making contributions for years into a pension delivering mediocre returns. The current system provides a natural hedge against this because you’re likely to end up with pensions across multiple providers, reducing the risk you put all your money in the worst-performing workplace pension.
“If the government want to do something to help people get to grips with their retirement savings and solve the problem of pension pot proliferation then we recommend they push on to deliver on Pensions Dashboards – before embarking on yet another ambitious pension project.”
Pensions Dashboards
“Pensions Dashboards would hand the initiative to individuals, giving them the tools to get to grips with their pensions when they decide the time is right.
“While they won’t prevent people building up multiple small pensions, they would make it relatively easy for them to get a handle on all their accounts and eventually consolidate them all in one place.
“Under development for years, Dashboards have been delayed and won’t now be delivered until after the general election – if they ever see the light of day after the government effectively passed the project on to the next administration.
“A lot of work has already been done to get Dashboards ready, but they need political backing to get over the finish line.”
Should you consider combining your pensions?
A ‘pot for life’ solution could take years to build. Pension savers shouldn’t wait for government to catch up with tackling small pots. Instead, there are plenty of reasons why combining your pensions now with a single provider can be a good idea. Most obviously, a single retirement pot is much easier to track and manage than having various pensions with different providers.
You could also benefit from lower costs and charges, increased income flexibility and more investment choice by switching provider.
Older pension schemes, for example, often charge more than modern pensions, while plenty of workplace schemes don’t offer a full range of retirement income options or restrict your investments to the firm’s own in-house funds.
Before transferring any old pensions, you should check there aren’t any valuable benefits attached which you may lose or exit charges that will be applied. Your provider should be able to tell you if this is the case.
If you do decide to consolidate with a single provider, assuming these are ‘defined contribution’ pensions – where you build up a pot of money which you can access from age 55 (to increase to 57 by 2028) – the process should be relatively simple.
You’ll just need to choose a provider with whom you want to consolidate your pensions and get the details of the pension or pensions you want to transfer over. Once you’ve given the relevant details to your new provider, they should do all the legwork for you.
You will then need to choose where to invest your pension. When doing this, make sure you are comfortable with the risks you are taking, have a diversified selection of investments and, crucially, keep your costs as low as possible.
The Pension Tracing Service is a useful tool to locate missing pensions, and some providers also may be able help. AJ Bell, for example, has a ‘Pension Finder’ service: Find my Pension | AJ Bell.
