Millions of UK pension savers could see changes to how small workplace pension pots are managed under proposals being considered by the Department for Work and Pensions (DWP).
The government is consulting on a framework that could eventually lead to the consolidation of certain small, dormant pension pots. The proposals are aimed at addressing the growing number of workplace pension pots created through automatic enrolment, particularly when people change jobs and leave behind relatively small balances.
According to the DWP, there are currently more than 13 million workplace pension pots worth less than £1,000, representing around £4 billion in retirement savings. The government also estimates that about 1 million additional small pots are created each year.
The proposed framework is intended to be operational by 2030. If implemented as outlined, the government estimates that around 20 million pension pots could eventually fall within its scope.
Proposal
The proposed consolidation framework is focused on certain defined contribution workplace pension pots created since automatic enrolment began on October 1, 2012.
Under the initial proposals, a pension pot would generally need to meet several conditions before being included. These include having a value of £1,000 or less, receiving no contributions for at least 12 months and being invested in a charge-capped default fund.
A default fund is generally the investment arrangement used when a workplace pension member does not choose their own investments. The charge cap places a legal limit on certain charges that can be applied to qualifying default arrangements.
The government is consulting on how the consolidation system should work rather than introducing an immediate automatic transfer of every small pension pot.
The DWP’s official consultation sets out the proposals and invites views on the framework.
Scope
The potential scale of the change is significant because workers can accumulate multiple pension pots during their careers.
Automatic enrolment has resulted in millions more people saving into workplace pensions. However, changing employers can mean that a worker leaves behind a pension with each previous employer.
A person who changes jobs several times could therefore have numerous small pension accounts instead of one larger retirement fund.
The DWP’s proposed framework is designed to address this fragmentation. Under the plans, eligible small and dormant pots could eventually be consolidated rather than remaining in separate schemes.
Not every pension pot would necessarily be covered.
For example, the initial proposals exclude certain older pensions held in very small schemes with no more than 100 members. Schemes that are in the process of winding up would also initially be exempt under the proposals.
Benefits
There are several reasons why a saver might consider consolidating pension pots before any government framework takes effect.
One is administration. Tracking several pension accounts can make it harder to understand the total value of retirement savings, investment choices and charges. Combining suitable pots can make retirement planning easier to monitor.
Consolidation can also provide an opportunity to review investment performance and charges. If another pension scheme offers a suitable investment option with lower costs or better features, transferring savings could potentially improve the overall arrangement.
Charges are another consideration. Some pension providers charge fixed administration fees. Paying a fixed fee across several small accounts can have a greater proportional impact than paying it once on a larger consolidated balance.
Technology can also play a role. Some modern pension providers offer online platforms and mobile applications that make it easier to monitor balances, manage contributions and review investments.
However, consolidation is not automatically beneficial. The terms attached to an existing pension should be checked before transferring money.
Protections
One of the most important reasons to examine an existing pension before transferring it is the possibility of a protected pension age.
Some older pension arrangements may allow the holder to access their pension from age 55. The normal minimum pension age for most people is scheduled to rise from 55 to 57 from April 6, 2028.
If a pension has a protected pension age, transferring it to another arrangement could affect that protection, depending on the circumstances and the rules applying to the transfer.
The MoneyHelper guidance on transferring pensions recommends checking the benefits and protections attached to a pension before moving money.
This is particularly important for older pension schemes, where benefits may not be available in newer arrangements.
Guarantees
Some older pensions can contain valuable guarantees that may be lost following a transfer.
One example is a Guaranteed Annuity Rate. This can provide an annuity at a rate specified by the pension contract, potentially offering a different level of retirement income from rates available on the open market.
Older policies may also include other benefits, such as guaranteed benefits or life insurance provisions.
For this reason, a pension with a small balance should not necessarily be judged only by its size. A pot worth less than £1,000 could still contain valuable contractual rights.
Anyone considering transferring such a pension should check the scheme documentation and understand what would be given up before proceeding.
Charges
Charges are another factor that needs to be considered carefully.
Consolidating several pensions into one account can reduce the number of administration fees a saver pays. But the new pension must also be assessed for its own charges.
A self-invested personal pension, or SIPP, may provide a wider selection of investments, but it can also have a different charging structure and may offer features that a saver does not need.
Similarly, a workplace pension may have negotiated institutional charges that are lower than those available through some individual pension products.
The right comparison is therefore not simply “many pensions versus one pension.” Savers should compare the total charges, investment options, benefits and protections attached to each arrangement.
Timing
The proposed consolidation framework is not expected to become operational until 2030.
That does not necessarily mean savers need to wait until then to review their pensions. People with multiple small pension pots can already check their arrangements and determine whether consolidation makes sense for their circumstances.
At the same time, there is no general requirement to consolidate simply because several pots are small.
For someone with very small dormant pensions, the potential cost of waiting may be limited. On the other hand, an existing pension could contain benefits that would be difficult or impossible to replace after a transfer.
The Financial Conduct Authority’s pension information also highlights the importance of understanding the implications of transferring pension savings, particularly where valuable benefits may be involved.
Decision
The DWP’s proposed £1,000 framework is intended to address the growing number of small workplace pension pots, but the consultation does not mean that every pension worth £1,000 or less will immediately be transferred.
For savers, the key issue is the individual pension’s terms. Consolidation can simplify administration, potentially reduce charges and make retirement savings easier to monitor. But transferring a pension can also mean losing protected access ages, guarantees, insurance benefits or other valuable features.
Before moving a pension, savers should establish what benefits the existing scheme provides, compare charges and investment options, and check whether any protections would be lost.
The proposed 2030 framework may eventually change how eligible small dormant pots are handled, but pension decisions made today should still be based on the specific terms and benefits attached to each individual’s savings.
