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Pension savers who have several small pensions soon could see their savings automatically consolidated under new government plans.
There’s currently an estimated 13m pensions worth less than £1,000 which have been paid into by savers who may have changed jobs after a short period of time. This vast number is due to the auto-enrolment system, which means employees are automatically enrolled into their employer’s pension scheme when they start work unless they decide to opt out. You can learn more about auto-enrolment in our article How does pension auto-enrolment work?
The government has been looking at ways to combine these small pension pots, with the aim of helping people to keep track of their savings, while also reducing the cost and complexity of pension provision.
The Department for Work and Pensions has now published its Small Pots Delivery Group’s report, which outlines its framework for consolidating small pension pots. The report sets out a roadmap for how the industry and Government can begin to consolidate millions of small, deferred pension pots, starting with those worth under £1,000.
Lisa Picardo, chief business officer at PensionBee, said: “Consolidation is not just a technical fix. It is about helping people take control of their retirement savings – avoiding unnecessary charges, avoiding losing their hard-earned savings, and enabling the achievement of better retirement outcomes.”
Here, we look at some of the benefits of consolidating smaller pensions, and why you don’t have to wait for the government’s reforms to be implemented to streamline your retirement savings.
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If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide Chartered independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial adviser. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 2,600 reviews on VouchedFor, the review site for financial advisers.
When will small pensions be automatically consolidated?
The aim is that default consolidation will be in place by 2030, so there are another five years to wait before these changes come into effect.
Once they are implemented, any pension pots you have that are worth less than £1,000 will be consolidated into just the one plan. Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “It’s easy to lose track of these small pots but over time they can grow and make a big impact on your overall retirement savings. Letting members know these small pots have been allocated to one provider reminds people about the existence of these important savings, gives them a better understanding of what they have and this can massively boost engagement.
“Of course, it’s no small undertaking. It will require rigorous standards around data and security to deliver a high-quality service that members can trust. The proposed deadline of 2030 for transfers to begin is punchy but the group is looking at what can be replicated from other projects to improve efficiency and reduce cost. One example is the industry’s experience of preparing for the Pension Dashboard, which means the quality of member data has significantly improved.”
Why consolidate your pensions now?
If you have several small pensions and don’t want to hang on until 2030 for the government to do it on your behalf, you can consolidate them now if you want to.
Bringing together similar pensions into a single scheme can make your finances easier to manage. Instead of juggling multiple statements and investment pots, you’ll have just one to keep an eye on – and you might even cut down on charges in the process.
But before you go ahead, make sure you’re not giving up any valuable benefits. Some pensions, for example final salary schemes, offer guaranteed income for life – and moving them to a personal pension could mean losing that certainty in exchange for an income that’s not guaranteed and carries investment risk.
Myron Jobson, Senior Personal Finance Analyst, interactive investor, said: “Understanding and engaging with your pension is crucial to avoid sleepwalking into an unsatisfactory retirement. Initiatives like the proposed small pots consolidator are part of broader efforts – including the long-anticipated pensions dashboard and the now-abandoned ‘pot for life’ proposal – aimed at getting people seriously engaged with their long-term savings.
“But there’s no need to wait for government action to get started. Savers can already consolidate old workplace pensions into a self-invested personal pension (SIPP), giving them access to a vast range of investment options and potentially lower fees. Flat-fee structures, in particular, can be cost-effective for those with pensions that could turn into a sizeable pot once brought together as the charges remain fixed even as your pension grows. Taking ownership of your retirement savings now could make a world of difference later on.”
Find out more in our articles Should I consolidate my pensions? and How to transfer your pension.
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If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide Chartered independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial adviser. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 2,600 reviews on VouchedFor, the review site for financial advisers.
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