New pensions pot consolidator could provide £1,000 pension boost
The Department of Work and Pensions has announced that the government intends to reform pensions management, combining small pension pots to help working people. It has been estimated that the move will boost retirement savings for the average worker by around £1,000.
The changes are part of the government’s Plan for Change and it is intended to implement them under the Pension Schemes Bill. The bill aims to drive investment in the pensions industry and deliver growth. It has also been suggested that the changes will save businesses £225 million per year in unnecessary administration costs.
Why are changes needed?
Many workers accumulate numerous small pension pots over their lifetimes, as they move to different jobs. There are around 13 million small pensions that contain £1,000 or less, and the number is increasing by £1 million each year.
It is not easy for savers to manage several small pensions and if they have to pay flat rate charges for each pension, they may not be getting good value for their investment.
What changes are proposed?
The government proposes that small pension pots will be combined into a single pension scheme for each saver. The scheme will be certified, confirming that it delivers good value. Individuals will be able to opt out if they choose.
In addition to reducing administration costs, it will be easier for investors to understand where their pensions are. It also has the potential to make workers better off, with an estimated £1,000 benefit to the average earner.
Businesses will have less work to do to comply with legislation and the government suggests that the move could also stimulate economic growth.
A small pots data platform is proposed to identify pensions that could be consolidated.
Comment
Minister for Pensions Torsten 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.”
Zoe Alexander, Director of Policy and Advocacy at the Pensions and Lifetime Savings Association, 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.”
Rocio Concha, Which? Director of Policy and Advocacy, said: “Which? called for the consolidation of small pots under £1,000 before the election, so we are delighted that the government is committing to doing this – a move that will provide greater value for savers and support them to keep track of their pensions.
“Which? looks forward to working with the government to ensure the pensions system is fit for the modern age.”
Gail Izat, Workplace Managing Director at Standard Life, part of Phoenix Group said: “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.”
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