The Chancellor Jeremy Hunt announced a consultation on pension ‘pots for life’ in his Autumn Statement.
The proposed reforms would enable employees to choose a pension that both their current and future employers contribute to, making it easier for people to keep track of their savings. At present, unless you’ve specified that you want your retirement savings to be invested in another fund, most pension savers are automatically enrolled into a one-size-fits all ‘default fund’. If they subsequently move jobs, they will then start a new pension with their next employer. Find out more about default funds in our article Where is my pension invested?
The Chancellor told MPs: “I will also consult on giving savers a legal right to require a new employer to pay pension contributions into their existing pension pot if they choose, meaning people can move to having one pension pot for life.”
Here, we explain what a pension ‘pot for life’ is and how the reform will work.
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How does the current workplace pension system work?
Under the government’s auto-enrolment scheme, your employer automatically enrols you into into its company pension scheme. Under current rules, anyone aged 22 or over earning a minimum of £10,000 from a single job is eligible for auto-enrolment. Read more in our article How does pension auto-enrolment work?
The current system means that employees typically pay into many different pension pots over their working life, as each employer may use a different scheme. Keeping track of these accounts can be a headache, and you may even forget about or lose the details of one or more of your pensions over time as you change employers. According to the Pensions Policy Institute, there is currently around £26.6 billion languishing in lost pension pots, which is money that could be used to boost people’s retirement income.
How will a pension ‘pot for life’ work?
The government is launching a consultation on the introduction of pension ‘pots for life’ which could take some time. If the reforms take effect, you’ll have a single workplace pension that both you and your current and future employers can contribute to throughout your working life. According to Tom McPhail, director of public affairs at research firm Lang Cat, this will enable you to keep track of your retirement savings more easily and effectively be ‘auto enrolment 2.0’.
All ‘pot for life’ pension providers will be regulated. Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “Appropriate regulation will ensure people continue to get good value from their pensions across the board. The upshot will be a system more centred on the member giving them extra choice.”
Is a pension ‘pot for life’ good for savers?
Pension experts are divided on whether the introduction of pension ‘pots for life’ is good news for savers. Some believe that it could help simplify auto-enrolment, which can see many people end up with a number of small pension pots if they work for a number of different employers. However, concerns include whether charges would actually be competitive, and how easy it would be for employees to choose a ‘pot for life’ that will be suitable for the duration of their working life.
Steve Webb, former pensions minister and a partner at LCP (Lane, Clark & Peacock), said: “Workplace pensions are currently a ‘wholesale’ business where employers negotiate a good value deal for their entire workforce. As a result, the average workplace pension charge is currently below 0.5%. If the system was fragmented, the bulk buying power of employers would be lost.
“Top earners would be bombarded with marketing as pension providers sought to ‘cherry pick’ the most profitable business. But the remaining workers would no longer have access to such a good workplace pension.”
He also stated that it could be difficult for employees to understand the difference between the various pension schemes on offer. He said: “We’re told not just to look at costs and charges, but are we really expecting consumers to evaluate the different investment strategies of their different pension providers?”
However, Becky O’Connor, director of public affairs at PensionBee, said the introduction of ‘pots for life’ would solve the problem that many people have keeping track of multiple pension pots during their working life.
She said: “‘Pot for life’ is a great solution to the problem of people having lots of old pensions from multiple jobs.
“A pension could become a bit like having a bank account, into which different employers can pay. It’s good for savers, giving them more say over how they want to grow their retirement fund and hopefully a decent solution to the problem of lost pension pots.
“Pot for life has the potential to shake up the industry, bringing what consumers actually care about to the forefront, boosting competition and bringing the way people engage with pensions into the 21st century.”
Will auto-enrolment rules remain the same?
At present, if you’ve been auto-enrolled into your employer’s workplace pension scheme, the minimum contribution is 8% of ‘qualifying earnings’. Of that 8%, your employer can’t contribute less than 3%, but they can pay as much of the 8% as they want. There are currently no further details on how pension ‘pots for life’ will work or when these will come into force. However, it’s expected that the minimum contribution limits currently in place under auto-enrolment will remain the same. There should be plenty more details to come, but it may be years before the changes take effect.
Emma Watson, head of financial planning at Rathbones, said: “In principle, the lifetime pot concept is a bold move and would have a major impact on the pensions market. But the proof will be in the pudding and will rely on the results of the consultation. Currently, many UK workers will accumulate a number of pension pots over their lifetime and will often only consolidate these at the point of retirement, meaning their pension savings often remain in default funds for the majority of their working life.”
Make the most of your pension money
It’s important to make the most of any pension savings you have, and you may have lost track of some. Even if you paid into a pension for a short time period decades ago, and think it’s worth very little, it’s worth tracking this down. You may alternatively want to combine your various pensions into a single plan. Read more about these subjects in our guides How to find old pensions and trace lost pensions and How to transfer your pension.
Check, too, where your pension is invested and if your investments are suitable for you. If you’re intending to invest throughout your retirement using drawdown to take an income from your pension, for example, you might be comfortable taking on more risk, as your investment horizon will be longer.A financial advisor can help you to make the most of your pension, and talk through your options to ensure you make the right choice for you.
If you’re aged 50 or over, you can get free guidance on the options available to you from the Government’s Pension Wise service.
If you’re thinking about getting professional financial advice, you can find a local financial adviser on VouchedFor or Unbiased.
Alternatively, if you’re looking for somewhere to start, we’ve partnered with independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,000 reviews on VouchedFor, the review site for financial advisors.
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