- Government plans to give savers the legal right to nominate a pension scheme for their automatic enrolment contributions (Looking to the future: greater member security and rebalancing risk)
- Under current rules, UK firms are required to set up a pension scheme for employees that meets certain minimum standards
- This means many people will build up multiple pensions throughout their career, with a growing risk those pots become ‘lost’
- Advocates of ‘pot for life’ (also known as lifetime provider model) reforms argue allowing employees to choose their own auto-enrolment scheme would help solve the £27 billion lost pension pots problem (Source: Briefing Note 134 - Lost Pensions 2022: What’s the scale and impact? (pensionspolicyinstitute.org.uk))
- However, this approach could mean significant additional cost for businesses large and small having to link up to an unlimited number of pension providers.
- Pensions Dashboards remain the most obvious solution to connect savers to their pension pots and ultimately enable more people to consolidate
- For those who want to get all their pensions together in one place, plenty of options already exist without the need to wait for
Rachel Vahey, AJ Bell head of policy development, comments:
“Although contribution rates remain too low, automatic enrolment has been successful in getting millions of people saving something for retirement. That success has, however, also exacerbated the challenge of people losing track of their pensions. Some estimates suggest the average worker changes employer around 11 times during their career, with each job hop potentially creating a new pension scheme with a new provider.
“The latest estimates suggest ‘lost’ pensions are now worth at least £27 billion, and still increasing. The government now wants to investigate the idea of giving pension savers the legal right to choose which workplace pension scheme receives their contributions when they switch jobs. Employees would potentially benefit from greater choice and flexibility, while the broader auto-enrolment market would be subject to competitive forces that are comparatively weak at the moment.
“The biggest sticking point to these proposals is the burden on employers. Currently, UK firms of all sizes – from corner shops to multinationals – are required to set up a workplace pension scheme for their staff. This is already a significant administrative undertaking. But forcing both large and small businesses to connect to any pension scheme an employee chooses could significantly increase that burden.
“Some sort of clearing house would be needed to channel member contributions to multiple schemes, with slick processes so firms are able to easily connect. But that still may leave employers with a pension administration headache.
“Building a clearing house won’t come cheap, and who would pay for it? This wouldn’t be a quick win either: it may be many years until we see a functioning solution.
“A lifetime provider model may appeal to those already engaged with their pension saving, but it may send marketing costs spiralling in an attempt to draw in those who are less concerned.
“With all these unanswered questions hanging in the air, a call for evidence to scope out the pros and cons feels like a sensible approach. Given the proximity of the general election and Labour’s substantial lead in the polls, there is every chance Keir Starmer’s party will have the final say on whether these reforms ever see the light of day.
“Given the amount of work that has gone into building Pensions Dashboards – reforms which would allow people to view all their retirement pots in one place, online – it is crucial the pursuit of any new reforms doesn’t derail those plans.”
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.
Reducing charges
The impact of reducing your pension charges can be significant, particularly over the long-term. For example, let’s take two people, Gemma and Chris, who each contribute £2,000 per year to their pension and enjoy 5% investment returns before charges. However, while Gemma pays just 0.5% in charges, Chris pays 1%.
After 30 years, Gemma could have a fund worth around £127,000, while Chris’ pot has grown to around £117,000 – a full £10,000 less.
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 – the process should be relatively simple. Note that the minimum age you can access your pension is set to rise to 57 in 2028.
If you have a ‘defined benefit’ pension valued at least £30,000 or more, you will need to take regulated financial advice before transferring. Where defined contribution savers build up a pot of money, defined benefit schemes provide an income for life from a set date, usually based on your salary and the number of years you have been a member of the scheme. Lots of providers will only accept a transfer from your defined benefit scheme where the adviser has recommended you do this.
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.
Many firms offer a choice of diversified funds designed to meet different risk appetites if you aren’t confident choosing your own investments.
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.
