Big change to pension rules plotted by the government and it could boost your pot by £1,000
SAVERS could be set for a major boost to their pension pots under new government plans.
The proposals, confirmed today, are expected to boost average retirement savings by around £1,000.
Currently, anyone who joins a new company is automatically enrolled into their employer’s pension scheme.
If you move to a new employer, you are then typically enrolled into their pension scheme and your old scheme is left to continue generating returns, but you no longer contribute to it.
Over the past few years, concerns have been raised that many people have a growing number of small pension pots that are difficult to keep track of and are generating minimal returns.
Around one million new small pension pots are now created every year, according to government estimates, and this number is only expected to rise.
Keeping track of many pensions can be difficult as you need to keep the paperwork and details of each scheme.
Having a number of small pots rather than one larger pension fund could result in lower returns for savers as they are making less money on each pot, which could damage their retirement income.
Meanwhile, each pot is charged a separate fee rather than one fee being levied, which could result in some savers being worse off.
The problem of small pots has been excacerbated in recent years as people change jobs more than they used to and defined benefit (DC) pensions, where you save up pot of money, have become the norm.
Auto-enrolment, a government policy that meant savers over a certain age and income must automatically join their workplace pension scheme, has also resulted in more pension pots.
But under new plans by the government, workers’ small pension pots will be automatically consolidated into one bigger scheme that the government determines provide good value for savers.
Pensions minister Torsten Bell has proposed to merge around 13million forgotten small pension pots worth £1,000 or less into a handful of larger schemes.
The plans are set to be included in the Pension Schemes Bill later this year.
Savers will retain the right to opt out of this automatic consolidation.
The proposals are also predicted to save pension schemes around £225million a year in admin costs, which could in turn save customers money.
A similar policy was first announced by former Tory chancellor Jeremy Hunt, but the plan did not come to fruition before the general election.
Alongside the announcement today, Mr Bell said: “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.”
How will the plans work?
Under the plans, a so-called “Small Pots Delivery Group” will support the design and implementation of a scheme to consolidate small pensions.
First, the group is creating a platform to identify and find all of the pension pots that could be consolidated.
It will then design a framework setting out the rules that a pehsion scheme would need to follow in order to become one of the schemes that small pots are consolidated into.
For example, they would need to have a specified level of scale, provide good value for money for savers in the scheme and provide additional protection.
Rocio Concha, Which? director of policy and advocacy, said: “Which? called for the consolidation of small pots under £1,000 before the election, so we are delighted that the government is committing to doing this – a move that will provide greater value for savers and support them to keep track of their pensions.
“Which? looks forward to working with the government to ensure the pensions system is fit for the modern age.”
What is pensions auto-enrolment?
HERE's what you need to know about pensions auto-enrolment:
What is pension auto-enrolment?
Since October 2012, employers have had to enrol their staff into workplace pension schemes as part of a government initiative to get people to save more for retirement.
When does auto-enrolment apply?
You will be automatically enrolled into your work’s pension scheme if you meet the following criteria:
- You aren’t already in a qualifying workplace scheme.
- You are aged at least 22.
- You are below state pension age.
- You earn more than £10,000 a year
- You work in the UK.
How much do I contribute?
There are minimum contributions that you and your employer must pay.
Your minimum contribution applies to anything you earn over £6,240 up to a limit of £50,270 in the current tax year. This includes overtime and bonus payments.
A minimum of 8% must be paid into the pension, with you contributing 5% and your employer paying at least 3%.
What if I have more than one job?
For people with more than one job, each job is treated separately for automatic enrolment purposes.
Each of your employers will check whether you’re eligible to join their pension scheme. If you are, then you’ll be automatically enrolled in that employer’s workplace pension scheme.
Can I opt out?
You can choose to opt out, but you’ll miss out on the contributions from the government and from your employer. If you do choose to opt out you can opt back in later.