The government has announced plans to address the growing issue of small, forgotten pension pots – a problem affecting millions of workers who change jobs frequently and accumulate multiple small pensions over time.

Currently, there are around 13 million small pension pots in the UK, each worth £1,000 or less. That number is growing by about one million a year. For savers, this means difficulty in keeping track of retirement savings and can mean paying multiple flat rate charges which leads to lower returns. Problems are caused for the pensions industry too; they estimate that the administrative costs of managing these small pots could be as much as £225 million a year.

What’s Changing?

Under reforms being introduced through the Pension Schemes Bill, small pots will be automatically consolidated into a single pension scheme that meets certain standards – including providing good value for savers. Individuals will still have the right to opt out if they wish.

This “pot for life” approach is expected to:

  • Cut down on flat rate fees applied to each small pot.
  • Make it easier for savers to manage their pensions.
  • Reduce admin costs for pension providers.
  • Improve long-term returns – the government estimates that the pension of an average earner could be boosted by around £1,000.

How It Will Work

Key features of the proposed system include:

  • A Small Pots Data Platform to help identify and match savers’ small pots.
  • Clear criteria for what qualifies as a “consolidator” scheme (including good value, scale, and consumer protection).
  • An opt-out option for savers who prefer not to consolidate their pots.

Industry Reaction

The proposals have received broad support from across the pensions sector. Organisations such as the Pensions and Lifetime Savings Association, Which?, and leading pension providers have welcomed the move, saying it will reduce complexity and help people get better outcomes from their savings.

What to Watch For

The Pension Schemes Bill is due to be introduced to Parliament later this spring. If passed, it will mark a significant shift in how pensions are managed, particularly for workers with multiple jobs over their careers.

Employers may want to start reviewing how the reforms could affect their workplace schemes and communications with staff.

If you have pension pots with various providers, then there could be value in consolidating them even if their value is more than £1,000.

See: https://www.gov.uk/government/news/1000-retirement-savings-boost-from-plans-to-bring-together-small-pension-pots