In his 2023 Autumn Statement, Jeremy Hunt revealed that the government would consult on “pot for life” pension reforms. If they do come into effect, the changes would give savers the legal right to require a new employer to pay pension contributions into their existing pension scheme. This could potentially give you more power to decide how you manage your pension savings. It may also reduce issues with lost pension pots. That said, some critics believe that the new reforms could be challenging to implement and may cause problems for employers.
Read on to learn how the proposed pot for life could affect your pension savings.
16% of people don’t remember how many pension pots they have
Since the introduction of auto-enrolment in 2012, employers have been required to automatically sign you up to a pension scheme and make contributions, provided you meet the earnings threshold.
This has improved pension participation and made it easier for savers to start building wealth for retirement. In fact, the Institute for Fiscal Studies (IFS) reports that the number of eligible private sector employees saving in a pension increased from 5.9 million in 2012 to 14.4 million in 2021. However, while auto-enrolment has improved pension participation, it could mean that you have multiple pensions to keep track of. This is because your employer chooses which pension scheme to enrol you in. If they choose a different provider to your previous employer, you pay into a new pension while any savings you’ve built so far remain in the old scheme. This could happen each time you start a new job.
As a result, you might have lots of different pensions and it’s easy to lose track of your savings, especially if you change job several times throughout your career. According to Pensions Age, 78% of people surveyed had between one and three pension pots while 16% didn’t remember how many pension pots they had. If you don’t keep track of your savings, you could easily lose old pension pots. These are valuable savings that you could use to fund your lifestyle in retirement. To avoid this situation, it’s crucial to regularly review and consolidate your pension pots. Understanding how much is enough for retirement can help in making informed decisions about your savings strategy. Taking proactive steps now can ensure that you have a clearer picture of your financial future.
The Mercia Group estimates that the average value of these lost pension pots is £9,500, increasing to £16,004 for those aged 55 to 75. The “pot for life” could potentially prevent this issue as you would no longer need to contribute to a new scheme of your employer’s choosing. Instead, you would be able to carry over your existing pot and your new employer would be legally required to contribute to this.
This means you could avoid paying into several schemes throughout your career, making it easier to keep track of your savings and reduce the chances of losing old pension pots. By consolidating your pensions, you can also benefit from a clearer understanding of your financial situation. Additionally, being aware of what is tax creep can help you strategize your savings for retirement, ensuring that you minimize unnecessary tax burdens as your income increases. Ultimately, a streamlined approach to your pension savings can lead to greater financial security in your later years. Additionally, consolidating your pension savings can also lead to potential cost savings on management fees, allowing you to maximize your retirement funds. However, it’s essential to consider the tax implications for savers, as different pension schemes may offer varied tax benefits that could influence your decision. Making informed choices can ultimately result in a more secure financial future during retirement.
It could be far easier to manage your savings if they’re all in one pot
Even if you know where all your savings are, it can be complicated to manage lots of different pensions. You may need to deal with different providers, who each have their own processes for managing your pension pot and making adjustments. Each scheme will also have different fees and charges, so it could be difficult to calculate exactly what your costs are. Having all your pensions in a single pot could streamline your savings, making it easier to check annual growth or change which fund your pension is invested in, for example.
Additionally, being able to choose your own pension provider means that you can pick a scheme that aligns with your financial plan. Currently, you normally pay into the scheme that your employer chooses. In some cases, investment fund options offered by your employer’s chosen provider may not be the most suitable for your unique financial goals.
While you can choose to pay into your own private pension, you may not benefit from employer contributions, so it could be harder to build your savings. However, the pot for life may give you more opportunity to select the pension scheme that is aligned to your financial plan, and your employer would be obligated to contribute to it. As a result, you may find it easier to reach your goals.
Critics have warned of issues with implementing a pot for life
While the pot for life proposal could make pensions simpler for employees, the idea has been criticised because it could be challenging for employers to implement. The government hasn’t shared a lot of details about exactly how the system would work, but critics have warned that it could be incredibly complex for employers, who would potentially be making contributions to many different pension schemes. There are fears that this could lead to less employer engagement with pensions. Employers that typically pay more than the minimum required by auto-enrolment could also be discouraged from doing so. This is because pension contributions may be very complicated under the new scheme and there could be additional administrative costs to bear.
Ultimately, this could lead to worse outcomes for savers as employers are less inclined to increase their pension contributions. This reluctance may create a ripple effect, where individuals are forced to rely more heavily on personal savings rather than employer-sponsored plans. As a result, the potential shortfall in retirement funding could significantly impact on financial planning and assisted dying, leaving many without the necessary resources to secure their desired quality of life in later years. The lack of adequate pension contributions not only jeopardizes financial stability but also raises ethical concerns around the support available for those facing end-of-life decisions.
Pension consolidation could offer many of the same benefits as the pot for life
The future of the pot for life is unclear and the challenges it could pose to businesses may mean that it never comes to fruition. Fortunately, you may be able to achieve some of the key benefits of the pot for life already, by consolidating your pensions. You could move pension savings you accumulated at old jobs into your current scheme or find a new pension provider altogether. Moving all your savings into one scheme could make it easier to manage your pension. You might also be able to reduce the fees you pay and gain access to different fund options by moving your savings to a different provider.
That said, pension consolidation may not always be the most sensible choice and you also risk reducing your retirement savings if you choose a provider with higher fees or poorly performing funds. That’s why it may be useful to seek professional advice to ensure you consolidate your pensions in a way that supports your financial plan.
Get in touch
If you are interested in the potential benefits of pension consolidation, we are here to help.
pot for lifeWondering if you’re on track for retirement? Take our quick retirement quiz to see if you’re ready for the future you deserve. For personalised advice, contact Flying Colours for expert Pension Planning, Investment Planning, In-Retirement Planning, and Tax Optimisation. Let us help you secure a confident and comfortable retirement.
Email hello@fcadvice.co.uk or call 0333 241 9900 for more information.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change. A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pension Regulator.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation, and regulation, which are subject to change in the future.
