The Department for Work and Pensions (DWP) has launched a consultation on a new system that could automatically consolidate small workplace pension pots, with the aim of having the scheme in place by 2030. The proposed changes could affect around 20 million pension pots, according to government estimates.
There are more than 13 million workplace pension pots worth less than £1,000, which together hold a total of £4bn in retirement savings, the DWP says. An extra 1 million pension pots are also created every year. The consumer watchdog Which? has examined the DWP's initial plans and what they could mean for retirement savings.
Which pension pots would be affected?
The DWP has initially proposed that the consolidation would target pots created since automatic enrolment was rolled out on October 1 2012, and those held in defined contribution pensions. The money would also need to be in a charge-capped 'default fund' – the standard investment plan savers are automatically placed into if they have not actively chosen their own investments. 'Charge-capped' means there is a legal limit on the fees that can be charged.
The initial rollout would be aimed at small, inactive pensions that have a value of £1,000 or less and have received no contributions for at least the last 12 months. Old pensions in a very small scheme – one with at most 100 members – or schemes in the process of shutting down would initially be exempt from automatic consolidation, the plans say. When the scheme is officially introduced in 2030, the government estimates that around 20 million pension pots will fall into its scope.
Should savers consolidate now or wait?
Which? has looked at both sides of the argument for savers wondering whether to act now or wait for the new system. There are six reasons to consolidate sooner: having one pot makes it much easier to keep track of retirement savings, for instance when moving house; managing funds across multiple pensions is more difficult if you want to make active investment choices; transferring other pensions into a pot with a 'protected pension age' of 55 may let you access all your money two years early – rather than 57 from 2028; moving money into one modern scheme can give access to a better app or online portal; having multiple pots means paying fixed, pound-based administration fees several times over; and consolidating lets you shift money to a scheme with a better-performing fund after charges.
However, Which? also outlines six reasons to delay. The cost of waiting is small if dormant pots are very small, so there is no need to rush. Some older schemes charge exit fees for moving money before the agreed retirement age, which could cancel out any financial benefit. Some workplace pensions have very good benefits or very low fees, but you often cannot get back in if you move money out. Older pensions can have perks like the 'Guaranteed Annuity Rate' or built-in life insurance, which would be lost if you move money out. Moving to a self-invested personal pension (Sipp) might give thousands of investment choices but with higher charges, which may not be worth it if you only want a standard fund. Finally, transferring money out of a pot that currently lets you access it at 55 would mean losing that option and having to wait until 57.
Opting out of the consolidation
Under the DWP proposals, savers who are happy with their smaller pots being combined but do not want to be assigned to the government's 'default' consolidator scheme will be able to actively select an alternative consolidator that better matches their personal financial goals. People will be notified when their pension is set to be moved. Officials say the framework requires schemes to formally communicate options before any automatic transfer goes ahead. And if you prefer to keep your small £1,000-or-less pension exactly where it is, you will have the right to opt out entirely.
