Keeping up with your finances can seem like a full-time job in itself but pension scheme fees are just one example of why you simply cannot leave your affairs unintended.
Automatic enrolment changed the face of pensions as we know it. Since its introduction in 2012, more than 10.2 million workers have been automatically enrolled and started saving more efficiently for retirement. However, it remains essential for the individual to be fully aware of how much they have saved, any fees involved and – crucially – the number and value of pots that they own.
Every time you start a new job, your employer will enrol you into a new scheme. Many of us have six different jobs or more over the course of our working life and with increased cases of redundancy since COVID-19, the impact on our pension pots is even more striking.
Research by the Pensions Policy Institute (PPI) shows that about 25 per cent of pots are worth less than £100 – many of these are small pots that simply get left behind and forgotten once the employee starts a new job and is enrolled into yet another new scheme.
Large Fees, Small Pots
Why is this so important? Some schemes will have a maximum charge based on a percentage of the value of your pot while others will have an annual flat fee, and may also charge for the underlying investment. Flat fees put many hard-earned savings at very real risk of being eroded away for those small pots that have been forgotten about after an employee moves to a new job. Along with administration charges and the fact that these abandoned pots have no growth potential, this makes pension pot consolidation even more of a pressing issue.
While there is currently no structure in place to allow individuals to transfer or consolidate small pots on a large scale, the government is looking at solutions. The Department for Work and Pensions Small Pots Working Group report published at the end of 2020 suggests a range of solutions including automatic or automated consolidation of small, deferred pension pots. In addition, the pensions dashboard concept represents a “digital revolution” for savers, enabling them to see all their pension savings in one place, understand how much they can expect each month in retirement, and find out how they can improve their retirement prospects.
The government has also introduced a ban on flat fees for pots under £100 which is an encouraging start but not enough to have the impact it needs. Data from the Pensions Policy Institute shows that 74 per cent of deferred pots in defined contribution schemes are smaller than £1,000 but just 25 per cent are less than £100.
Solving the Consolidation Issue
Widespread consolidation and automatic transfers present potentially effective solutions but – while any solid resolution remains hanging in the balance – it is essential for savers to take action. The PPI research shows that, without intervention, the number of deferred pension pots (those without any contributions or withdrawals being made) could increase from 8 million to 27 million by 2035. Increasing pension pot engagement is key to the solution to avoid things escalating further. Encouraging individuals to think about their savings will create a solid pathway towards member-led consolidation.
While analysis from Quilter shows that pension savers could save more than £140,000 by consolidating multiple pensions into a single pot, fees are not the only thing to consider. As annual charges vary so much between providers, it is essential for savers to understand any charges involved and how much difference consolidation – or an alternative financial planning route – could make to their overall retirement fund value.
For employers, this means opening up a conversation with your team to ensure that they are saving for retirement in the most effective way. It means helping them understand how to locate old pension pots, either by contacting old employers/the scheme providers or by using the Pensions Tracing Service. Creating healthy employer-employee conversations all creates a stronger workplace culture and a healthier financial future resulting in a more satisfied, more productive team.
For individuals, this means sitting down with a professional adviser to create a realistic picture of your ideal retirement and the steps that you need to take to reach your goals. This will help you to understand whether consolidation is the most effective answer and the part it might play as part of a wider holistic financial planning strategy.