The plans, announced by the Department for Work and Pensions, are being put in place to help keep track of retirement savings
Millions of Brits could see their retirement savings boosted by an average of £1,000 as part of a Government initiative announced to tackle the growing problem of small, forgotten pension pots.
The plan, which will be included in the upcoming Pension Schemes Bill, aims to simplify pension management by consolidating pots worth £1,000 or less into a single scheme.
It is hoped the proposal will not only make it easier for savers to keep track of their pensions but also save the industry £225m annually in administrative costs.
Although the move has long been discussed, it was officially revealed today (24 April) by Labour as part of its wider efforts to increase economic growth.
How will it work?
Small pension pots – categorised here as those £1,000 or under – which have been accumulating as workers change jobs, now number 13 million and are growing by around one million annually, according to the Department for Work and Pensions (DWP).
Under the proposed changes, these small pots will be automatically consolidated into a single pension scheme managed by authorised workplace pension providers.
The aim is to ensure that savers can see all their pension savings in one place, reducing the complexity and costs associated with managing multiple small pots.
Torsten Bell, Minister for Pensions, said: “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.”
There will be the option to opt out for those who don’t wish their money to be automatically moved.
The Government’s initiative is part of the wider Pension Schemes Bill, which is expected to be introduced in Parliament later this Spring.
According to the DWP, it is estimated that the reforms could benefit more than 15 million people, boosting their pension pots by up to £11,000 and driving greater investment in productive assets.
Experts are divided over the plans
The plan has faced some criticism from experts who question the effectiveness of simply consolidating smaller pots without addressing the underlying issue of people losing track of their pensions altogether.
Sir Steve Webb, former pensions minister and partner at LCP, said: “The issue surrounds people losing small pension pots when they move jobs.
“Something has to be done about this. However, I don’t like this idea for two reasons.
“One is, suppose I leave £1,500 in a pot somewhere after leaving a job – in theory, under these rules, that will just stay where it is. If all the Government plans to do is sweep up tiny pots, we will hardly be better off.
“Secondly, crucially, even if they went bolder and extended the limit above £1,000, there is the chance of sweeping the pension to the wrong place and wrong provider.
“If there were ‘magnetic pensions’, where your pension pot followed you from job to job, your money would build up in the right place – in the pension you are currently saving into.”
He estimated that the plans were unlikely to take effect until at least 2030 which means it is will be years before savers feel the benefits.
However, others have welcomed the move as progress.
Zoe Alexander, director of policy and advocacy at the Pensions and Lifetime Savings Association (PLSA), said: “The accumulation of small pots creates unnecessary cost and complexity for savers and schemes alike.
“The PLSA has worked extensively with industry and the DWP to propose solutions and supports the model being proposed by the Government.
“We look forward to working on delivering the recommendations of the Small Pots Development Group and are pleased the Government is tackling this long-standing issue in the Pension Schemes Bill.”
Gail Izat, workplace managing director at Standard Life, part of the Phoenix Group, added: “The number of small pots in the system is growing at a rate of knots and ultimately heightens the risk that people will lose track of their hard-earned savings.
“The introduction of consolidators that can administer these pots effectively and invest them dynamically will be a step forward and when combined with pension dashboards will empower people to take control of their savings.”