AJ Bell has called upon the Government to adopt a joined-up strategy to deal with lost pension pots, as new data reveals that the number of deferred small private pension pots is rapidly growing.
A report from the Institute for Fiscal Studies found that in 2023, there were around 20 million defined contribution pension pots worth under £10,000 which are no longer being contributed to. In aggregate, these contained almost £30 billion.
Over half of these pots, 12.1 million, were worth under £1,000. The IFS said these numbers have increased rapidly in recent years and are likely to continue to grow without policy action. Based on information from five large pension providers, the number of deferred pots worth less than £1,000 increased by almost two million from 2020 to 2023. Lower earners and women are particularly likely to accumulate small pension pots.
The research institute described the issue as “burdensome” for savers and pension providers.
“Smaller pots are uneconomical for pension providers, with there being some fixed costs of administering pots, leading to higher charges and therefore lower returns for savers. In addition, having several, or potentially many, small pension pots, rather than one big pension pot, makes managing saving and drawdown decisions harder for individuals, and increases the likelihood of them losing track of a part of their savings,” the report said.
The IFS said the status quo is “not fit for purpose” and said there is a “strong case” for deferred small pension pots to be consolidated by default, with people given the option to opt out of consolidation if they wish. In addition, the IFS said individuals who have more than one pot with the same pension provider should have these pots automatically consolidated together.
Rachel Vahey, head of public policy at AJ Bell, said: “Automatic enrolment is one of the big public policy success stories of our time. 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.
“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 and reuniting them with lost pension wealth,” says Vahey.
“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,” she added.
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