Jeff Salway: More reform is needed to help workers with multiple pension pots
IF I ever need a reminder as to how financial services companies have lost touch with the real world in which their customers live, the regular statements sent to me by pension providers generally supply it.
Jargon ridden, too long and loaded with caveats, it’s all too easy, even after recent improvements, to take one look at the pension updates sent out by most firms and consign them to the bin/recycling/groaning paperwork folder/cat litter.
Last week – in an ultimately doomed spring cleaning frenzy – I finally sorted through the pile of pension statements I have shoved to the back of the cupboard. In just 15 years of full-time employment, I’ve opened four workplace pension plans, all a bit skinny and mediocre, not to mention neglected.
That puts me among millions of workers to have collected an array of pensions that, combined, may one day be worth the postage used to send out the twice-yearly statements.
The biggest problem with all these small pension pots is that there’s not much you can do with them. As a disincentive to saving and taking out pensions with new employers, that’s quite powerful. Try going to an annuity provider with a pot of less than £10,000. Most will turn you away, while getting professional advice on pension savings totalling less than £50,000 is similarly difficult – even though the vast majority of people retire with savings of less than £50,000.
£400m of assets is held in UK pension accounts worth less than £2,000 and into which contributions are no longer made, according to new figures from the Institute for Fiscal Studies.
Yet currently anyone with total pension pots worth more than £18,000 must convert their various small pots into an annuity. That leaves many stuck with having to take the deal offered by their existing pension firm, missing out on the chance to shop around for a better deal.
The National Association of Pension Funds estimates that retirees are collectively missing out on around £1 billion a year because of the practice among annuity providers of tailoring their best prices to the bigger pension pots.
Things are improving, however. Under new rules coming into force next Friday, savers with total pensions worth more than £18,000 but one or more personal pension pots of less than £2,000 will be able to take those as cash when they reach 60. The option has been available on pots of less than £2,000 from occupational schemes since 2009.
It’s still not enough though. This is an issue which the government and the pension industry has, over the last 20 years, simply failed to address.
The overwhelming response to a recent consultation on the issue from pension providers, consumer groups and trade bodies was that further reform is desperately overdue.
And it needs to happen, because the number of people with different baskets of pension savings is going to rocket over the coming years. It was set to increase sharply even before the introduction of automatic enrolment into pensions. Beginning this October, those reforms could create another 200,000 small pension pots every year, it’s been estimated.
Auto-enrolment is expected to result in around five million workers entering a pension scheme for the first time. Of the various solutions put forward by industry bodies and pension firms, the proposal for employees to automatically take their pension pots with them when they change employer is the closest to being in the interest of savers. More realistic is a central register of all pensions, making it easier for individuals to identify, track and move what they have. Whatever the solution, it needs to happen soon.
The climax of the individual savings account (Isa) season should merely be about finding the best deal for your annual allowance. However it’s now also the time of year for Isa savers to check the account they took out last time, as there’s a good chance the return it pays is about to plummet.
The top five easy access Isas in the best buy tables in March 2011 had an average bonus of 1.83 percentage points. Now those bonuses are set to disappear, leaving savers with millions of pounds languishing in once-competitive accounts suddenly paying as little as 0.5 per cent.
Banks and building societies are persisting with bonus accounts for a very good reason – they know most of us will either forget to switch away after a year or just not be bothered to shop around for yet another deal.
Not only does the initial bonus push the account into the best buy tables, but it attracts countless savers who will fail to move their cash elsewhere when the extra return is no longer paid.
Bonuses can be valuable, as long as you keep an eye on the rate and don’t let your bank get away with its tricks. In the long-term, however, in undermining the simplicity of cash Isas the trend threatens the popularity one of the great savings successes of the last decade.
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