Martin Lewis, founder of MoneySavingExpert.com (MSE), has weighed in on the UK government’s proposed changes to small pension pots, offering critical insights for those with several small pots.
His team has evaluated how these changes could impact pensioners, shedding light on the importance of understanding and managing these pension funds. The government is set to consolidate small pots under £1,000, a move that could simplify pensions for millions of Brits.
As people change jobs over the years, it is common for them to leave behind pension pots valued at £1,000 or less. According to MSE, the government’s proposals could help people with such pots save significant administrative fees and make managing their pensions more straightforward.
Understanding the Government’s Proposed Changes
The UK government has acknowledged that millions of workers have accumulated multiple small pension pots, often due to changing jobs throughout their careers. The Department for Work and Pensions (DWP) reports that there are currently 13 million small pots, each holding £1,000 or less, and the number continues to grow by about one million annually.
The proposed changes under the Pension Schemes Bill, outlined during the King’s Speech in 2024, aim to consolidate these smaller pots into one larger account. Under this plan, workers would automatically have their small pension pots rolled into a single pot managed by an authorised provider.
According to government estimates, this process could save the average worker approximately £1,000 in administrative fees. The consolidation will simplify pension management and reduce the risk of workers losing track of smaller pots or accumulating unnecessary charges.
However, the change will not affect those with pension pots worth more than £1,000, as the consolidation scheme is capped at that threshold. Those with larger pots will still manage them separately unless they choose to consolidate voluntarily.
Potential Benefits and Drawbacks of Pension Pot Consolidation
The consolidation plan offers several advantages, particularly for people who may be unaware of the fees associated with maintaining inactive pension pots. Martin Lewis’s team points out that smaller pension pots can be subject to ongoing administrative fees, which over time may reduce the total value of the savings.
By consolidating these pots, workers will have a clearer overview of their pension savings and could take action to reduce fees by switching providers if needed.
However, the plan has raised concerns within the pensions sector. The Institute for Fiscal Studies has suggested that the cap on consolidation should be higher, to avoid excluding those with slightly larger pots from benefiting from the changes.
Critics argue that without addressing this, some individuals might still face a fragmented pension situation that could prove detrimental in the long run.
While the government’s plans aim to address a growing problem, the full impact remains to be seen once the proposals are put before Parliament later this year. The changes could offer greater clarity and efficiency for those managing smaller pensions, but ongoing debates will likely continue regarding the fairness of the £1,000 cap.
