Small pension pots to be automatically combined in future under Government plans – here's what it could mean for you

Announced today (Thursday 24 April), the plans form part of the Government's Pension Schemes Bill, set out during the King's Speech in July 2024, which will be put before Parliament by July this year.

Since the introduction of auto-enrolment in 2012, the number of pension pots holding £1,000 or less has increased rapidly, growing by one million last year alone. There are now around 13 million of these small pension pots, according to Government figures.

This is because as employees leave one job for another, they are automatically enrolled into their new workplace pension scheme leaving the old one behind. As a result, over time, these can accumulate across different providers and stagnate or get lost or forgotten – which the Government is now looking to address.

How the new scheme could work

The proposals are still at an early stage, so details are scant – but here's what we know so far:

• Smaller pension pots would be "hoovered up" and consolidated into one larger pot. 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.
  
  Under the new plans, you would instead have one larger pot. 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).

• The consolidation would be done by authorised providers. Providers would need to adhere to specific rules set out by the scheme to qualify and will be regulated by the Financial Conduct Authority and The Pensions Regulator.

• It's likely to be an automatic process, with the option to opt-out. The Government says it is also likely to include a dispute and appeals process to protect savers from errors. Savers will also be able to choose their provider once their pots have been consolidated.

• The scheme will initially be capped at pots with £1,000 or less in them. The Institute of Fiscal Studies think-tank has previously argued that any cap should be increased over time to avoid falling behind inflation.

These changes will apply to defined contribution pensions, but not defined benefit pensions. We're checking whether self-invested personal pensions will be impacted.

We've also asked the Government for further information on the proposals including when they would come into force and whether there are any consolidation fees involved.

Experts say the proposals could reduce complexity and costs for savers – if done well

Lisa Picardo, chief business officer at provider PensionBee, identified several potential benefits: "A well-designed consolidator model would help to bring scattered savings together, reduce the risk of money being lost or forgotten, and help people build a clearer picture of their retirement income. Consolidation can also help drive down charges on small pots, which can be disproportionately high."

Zoe Alexander, director of policy and advocacy at trade body the Pensions and Lifetime Savings Association, said the new rules will reduce complexity for savers: "Having a process by which small pots are transferred to designated consolidators under certain conditions, will help to address the proliferation of small pots, make pension pots easier for savers to keep track of and lead to cost savings."

Pete Glancy, head of pensions policy at Scottish Widows, agreed: "It costs money to administer each pension pot, so a smaller number of them overall will mean that costs across the pension industry will fall, and that in turn means that charges which apply to customers should reduce further in the future."

But some have also raised potential problems

Ms Picardo cautioned that the success of the initiative "will depend on the details", adding: "The process must be frictionless for savers, with strong consumer protections in place to ensure that pots are only moved in their best interests. Clear communication will be vital, along with robust data standards and transparency around fees and outcomes."

And former pensions minister Sir Steve Webb told us he saw two major issues: "Firstly, if you stop at £1,000 you hardly make any difference because you still end up with lots of other fragmented micro-pots elsewhere containing, say, £1,500 or £2,000.

"Secondly, ideally you want your pension money to be held under a scheme at the place you're currently working as this is where people engage best with their pension. In its current format, what's most likely to happen is people will build up pension pots with a scheme they haven't chosen and don't have a relationship with; and therefore will not be getting the most out of it."

Sir Steve said he was also concerned that the new proposals could prove to be a distraction from the upcoming Government-run Pensions Dashboard, expected to be rolled out in 2026, which will allow people to access information about their pension online, in one place.