The government wants to make it easier for people to keep track of their old workplace pension by setting up a system so that if you have a small amount saved into your workplace scheme it will automatically follow you to your next job. It’s definitely a good idea to make it easier for us to move our pensions when we switch jobs, as too many people lose track of theirs — or even forget them altogether. But there are disadvantages to having a scheme where your pension follows you to your new job.
Why the government is acting
The government wants people who have ‘small pension pots’ (probably less than several thousand pounds in size) to be able to move them into one larger pot more easily. At the moment, many people lose track of their pensions and when automatic enrolment starts on October 1st (which will see millions of people automatically signed up for a workplace pension scheme) it’s likely there will be millions more small pension pots left in previous employers’ schemes.
What the research says
– 58% of people questioned by the ABI (Association of British Insurers) wanted their pension to move with them as they switched jobs, with only 10% wanting their old pension to move to a central ‘aggregator’ scheme.
– According to research by Aviva, 65% of women didn’t know the value of their pension pots, and 61% were in favour of combining their smaller pensions into one big ‘pot’. Similar research carried out by Friends Life shows that 70% of people don’t know the value of their pensions.
SAVVY TIP: It’s not just the question of knowing how much you’ve got that’s important (although that is an issue because if you don’t know how much you’ve saved towards your retirement you can’t work out whether or not it’s enough), but there’s also the problem of some annuity providers not being interested in quoting a rate for very small pension pots.
How could the scheme work?
The government hasn’t yet decided exactly how the scheme would work, for example, what counts as a ‘small’ pension? The government does want to introduce a cut off point when a pension will be too big to automatically follow someone to their new job. The four limits being looked at are Â£2,000, Â£5,000, Â£10,000 and Â£20,000.
– Initially the scheme will be limited to auto-enrolment pensions The ‘pension follows member’ scheme wouldn’t be introduced across the board. In the early stages it will only apply to pensions that people have been automatically enrolled into.
– The government may ban certain schemes from being transferred. If, for example, you had a small pension from when you joined a final salary scheme, you’d almost certainly be better off leaving it where it was rather than transferring it to a stock market linked workplace pension where your returns depend on how well — or badly — the pension fund’s been invested.
Pros and cons
The government’s proposals, of pension pot following the scheme member, have advantages and disadvantages:
– It’s easy to understand. When you move to a new job, you know that your pension will follow you if it’s below a certain size.
– It’s easy for people to keep track of their pension. By linking someone’s old pension schemes to their new job, it will reduce the likelihood of the pension getting lost or forgotten.
– Your pension could be transferred to a worse scheme. Even if you’re transferring between two similar types of workplace pension, you may transfer your money from one that has lower charges to one that has higher charges without realising it.
SAVVY TIP: The alternative which the government considered, but has dismissed, is a scheme where pensions are aggregated into a central pot.
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