The Department for Work and Pensions (DWP) has unveiled a new initiative to tackle the growing problem of small, forgotten pension pots, which could see pension savers receive a £1,000 savings boost.
Under this reform, smaller pots will automatically be consolidated into one high-performing pension scheme with the aim of simplifying pension saving for millions of workers.
According to the DWP, this consolidation will reduce costs and administrative hassle for savers while potentially boosting retirement funds.
The scale of the problem is significant, with 13 million small pension pots holding £1,000 or less currently in existence across the UK, increasing by around one million every year.
Pensioners could get a sizable £1,000 retirement savings boost
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These fragmented savings create unnecessary hassle for savers and can prevent them from getting good returns when they have to pay multiple flat-rate charges.
Furthermore, the pensions industry also faces around £225million in unnecessary administrative costs overseeing these small pots.
Savers will retain the right to opt out if they prefer to keep their pensions separate. This consolidation is expected to increase an average earner’s pension pot by around £1,000 over time.
The initiative aims to cut red tape for businesses managing these schemes while boosting living standards as part of the government’s Plan for Change.
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Labour’s new pension minister outlined how older households will benefit from the DWP move
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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.”
The announcement follows work by the Small Pots Delivery Group, which developed key recommendations for implementation. These include creating a Small Pots Data Platform to identify pensions suitable for consolidation.
Safeguards for savers will include an opt-out option and additional protection from flat fee charges.
Myron Jobson, a senior personal finance analyst at interactive investor, emphasised the importance of engaging with pension savings.
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Britons are worried about their pension savings GETTY “Understanding and engaging with your pension is crucial to avoid sleepwalking into an unsatisfactory retirement,” he said.
Jobson noted that savers do not need to wait for Government action, as they can already consolidate old workplace pensions into a self-invested personal pension.
He added: “Flat-fee structures, in particular, can be cost-effective for those with pensions that could turn into a sizeable pot once brought together as the charges remain fixed even as your pension grows.
“Taking ownership of your retirement savings now could make a world of difference later on.”
