The Department for Work and Pensions (DWP) has proposed a major overhaul of the pension system that could see millions of small workplace pension pots automatically merged under a £1,000 rule. Official proposals could affect up to 20 million pension pots by 2030.
According to the DWP, there are currently more than 13 million workplace pension pots valued at less than £1,000, amounting to a combined total of £4bn in retirement savings. An additional 1 million pension pots are created every year.
Consultation and scope of the scheme
The DWP has launched a consultation examining how a new framework for consolidating small pension pots might operate. The scheme is intended to be in place by 2030 and could have an impact on 20 million pension pots.
The pension pots earmarked under the plan would be those established since automatic enrolment was introduced on October 1 2012, with the focus falling on pots held within defined contribution pension schemes. The funds would also need to be held in a charge-capped default fund.
While this sounds complex, it is the standard investment arrangement you are automatically enrolled into if you have not actively selected your own investments. The term charge-capped refers to a legal ceiling on the fees that can be levied.
Initial rollout and exemptions
The initial rollout would target small, dormant pensions which are valued at £1,000 or less and have not received any contributions for at least the previous 12 months. Older pensions in a very small scheme – one with no more than 100 members – or schemes currently winding down will be initially exempt from automatic consolidation, according to the proposals.
Consumer watchdog Which? has examined both sides of the debate, outlining reasons to consolidate sooner or delay consolidation.
Reasons to consolidate or delay
Reasons to consolidate sooner include taking control of investments, taking advantage of an age 55 protection, improving returns, simplifying admin, stopping multiplying fees, and getting better tech. Reasons to delay include potential exit fees, paying for options you don't need, losing an age 55 protection, giving up a good workplace scheme, the small cost of waiting, and losing valuable guarantees.
