Pensions worth up to £1k could be merged automatically: New plan to deal with 13m tiny

Small pension pots worth £1,000 or less could be automatically moved into government-approved ‘consolidator’ schemes under pending new legislation.

Savers are expected to be allowed to opt out if they don’t want their pensions merged in the official schemes.

The plans are aimed at saving pension firms the £225million admin bill for running millions of small pots.

The Government says in time the move could also boost the retirement savings of the average worker by around £1,000 due to reduced costs, plus relieve the hassle of trying to keep track of pots.

Under pension auto enrolment, savers often amass a large number of pots during their working lives as they move jobs.

But many never bother combining them, and there are now an estimated 13 million small pension funds holding £1,000 or less.

A tidying up exercise can reduce fees and paperwork and bring new retirement investing options – read our guide to combining pension pots here.

Merging pensions: Small pots plan could cut costs for savers and firms, says the Government 

Merging pensions is not always advisable because you can risk losing valuable benefits attached to employer schemes.

But the small new pots built up since auto enrolment, which are the focus of the current Government plans, are unlikely to have such legacy issues.

The reforms, due to appear in the new Pension Schemes Bill this spring, are not expected to come into force until 2030.

They are based on work by the Small Pots Delivery Group, chaired by the Department for Work and Pensions and including industry and consumer organisations and regulators.

The group suggested:

– Creating a Small Pots Data Platform to identify pension pots that could be merged;

– Rules on which pension schemes could be approved as official ‘consolidators’, including being big enough to cope with the business, providing value for money, and not imposing flat fees (flat charges can eat up small pots, unlike percentage fees);

– Safeguards for savers including the right to opt out.

Pensions Minister Torsten Bell says he wants 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.

Former Pensions Minister Steve Webb, who is now This is Money’s retirement columnist, says: Whilst action to deal with scattered small pots is welcome, it will be years before there is a material improvement under these plans.

‘With no transfers likely to happen before 2030 at the earliest, and a focus just on the very smallest pots, millions of retirees will still reach pension age with multiple pension pots.’

Webb, who is a partner at pension consultant LCP, adds: ‘It is also regrettable that consolidation is happening into new third-party consolidator schemes rather than into the saver’s current workplace pension, as this is where they are likely to be most engaged with their pension.’

When Webb was Pensions Minister in the Coalition government, he proposed a ‘pot follows member’ scheme allowing workers to take small pension funds worth less than £10,000 with them when they changed jobs, but this plan was shelved in 2015.

Gail Izat, workplace managing director at Standard Life, says: ‘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.’