Martin Lewis, along with his MoneySavingExpert.com (MSE) team, has provided valuable insights into the upcoming pension reforms set to impact individuals who have accumulated multiple smaller pension pots over time.
These changes are part of the Pension Schemes Bill, initially introduced during the King’s Speech in July 2024. The bill aims to tackle the growing issue of workers unintentionally leaving behind multiple small pension pots, often worth £1,000 or less, due to frequent job changes.
BirminghamMail reports that these pots often incur fees that diminish their value, causing financial inefficiency.
As a result, the government seeks to simplify the process and make it easier for individuals to manage their pensions by consolidating smaller pots into a larger one, potentially increasing savings and reducing administrative costs.
The Impact of Smaller Pension Pots on Brits
The main issue stems from individuals changing jobs, leaving behind small pension pots with providers, sometimes valued at £1,000 or under. These small pots can multiply over time, each potentially incurring fees for ongoing management. As these pots accumulate, the fees can significantly erode the value of the savings.
The MSE team explains that under the new proposal, these smaller pension pots would be consolidated into a single, larger pot, likely managed by authorized providers. This automatic consolidation process would help streamline pension management and reduce ongoing administrative fees, potentially saving the average worker £1,000.
The Government estimates this will boost the average worker’s pension by £1,000 in admin fee savings and will make it easier to keep an eye on ongoing fees (and reduce them if needed – by transferring providers, for example).
Currently, when individuals stop paying into a pension pot—often after changing jobs—they may still incur management fees. As the MSE explains:
Currently, if you stop paying into a pot – when you change jobs, for example – you might still have to pay a fee for your provider to continue to manage your account. Over time, this can eat away at the value of your savings.
Details of the New Pension Pot Rules
Under the new reforms, only small pension pots valued at £1,000 or less will be impacted by the changes. Those with pots exceeding this value will not be affected by the consolidation process. The consolidation will likely be automatic, although individuals will have the option to opt out if they prefer to keep their pots separate.
The Department of Work and Pensions (DWP) has reported that there are now 13 million small pension pots in the UK, each valued at £1,000 or less, and that number is increasing by approximately one million pots each year. The government sees these growing figures as a major issue, prompting the new rules aimed at simplifying pension management.
The DWP said : There are now 13 million of these small pots, holding £1,000 or less, with the number increasing by around one million a year.
While the government has set a £1,000 cap on the new rules, the Institute of Fiscal Studies has raised concerns about the potential financial impact on workers with slightly larger pots. The institute suggests that the cap should be raised to include those with pots just above the £1,000 threshold to avoid financial disadvantage for these individuals.
