- There were around 20 million defined contribution (DC) pension pots valued under £10,000 in 2023 which are no longer being topped up and are worth a total of almost £30 billion, according to an IFS report
- The think tank claims over half of these pots, or 12.1 million, were worth less than £1,000
- A combination of people switching jobs and automatic enrolment into workplace pensions is behind the increasing number of lost pensions
- In October 2024, the government repeated its commitment to developing pensions dashboards which should make it easier for savers to locate old pots and combine pensions
- The Department for Work and Pensions (DWP) has been working on plans to automatically consolidate small pension pots of less than £1,000 and has also consulted on plans to drive consolidation within workplace DC schemes to create pension ‘megafunds’
Rachel Vahey, head of public policy at AJ Bell, comments:
“Automatic enrolment is one of the big public policy success stories of our time. Since 2012, over 11 million people have been automatically enrolled into pensions, creating many new pension savers.
“But it’s not without its flaws. People switch employer, and then switch pension, leaving their old one behind, neglected and unloved. This has created a plethora of small pension pots which are easily forgotten.
“According to the IFS, pension wealth in pots worth less than £10,000 stood at a whopping £30 billion in 2023, with over half of those pots sitting on a pension valued under £1,000. What’s more, these pots are no longer being contributed to, meaning it’s possible the owners have forgotten about them. This lays bare the problem facing millions of people who could be in danger of missing out on thousands of pounds of disconnected pension money that could be easily integrated back into their long-term financial planning through consolidation.
“The government has several initiatives already in play that could help turn this situation around. But these all appear to be separate endeavours, with no common thread binding them together or consideration of how one plan affects the others.
“The government needs to take a step back and survey the pensions landscape. It then needs to join the dots on its plans for DC consolidation into ‘megafunds’, small pots automatic consolidation and guided retirement to create a joined-up strategy for tackling this problem.
“Pensions dashboards also have a big role to play, allowing savers to see all their pensions in one place online, reuniting them with lost pension wealth. Targeted support can add even more value, providing more useful personal suggestions to those faced with solving the problem of multiple pots. But the government first needs to set in stone a date for the launch of commercial dashboards, offering a clear path forward for firms to deliver dashboards and allowing millions to view all their pensions in one place simply, easily and quickly.”
Should you consider combining your pensions?
There are plenty of reasons why combining your pensions with a single provider can be a good idea. Most obviously, a single retirement pot is much easier to track and manage than having various pensions with different providers.
You could also benefit from lower costs and charges, increased income flexibility and more investment choice by switching provider.
Older pension schemes, for example, often charge more than modern pensions, while plenty of workplace schemes don’t offer a full range of retirement income options or restrict your investments to the firm’s own in-house funds.
While a charge cap of 0.75% applies to the default investment option in auto-enrolment workplace pensions today, many pension policies, including older contracts or those setup outside auto-enrolment, may carry higher fees.
The impact of reducing your pension charges can be significant, particularly over the long term. Someone combining three pensions with charges of 1.5 to 0.75% could boost their pension pot by over £7,000 over 10 years or £20,000 over 20 years if they were to switch to a single, lower cost account (see table below).
