Don’t let pensions go to pot on changing jobs

New rules are to be introduced to prevent workers from losing track of their pensions when changing jobs amid concerns that some will could be shifted into inferior and more expensive schemes as a result.

The government has confirmed that it is to press ahead with a “pot follows member” system where workplace pensions worth less than £10,000 would automatically move with the employee upon change of employer. Currently the onus is on employees to transfer their pension pots every time they switch jobs.

The aim is to tackle the problem of pensions being left unclaimed due to high job turnover. One in four workers has lost track of pensions after changing employer, according to Age UK, including some for whom the savings could have made a material difference to their retirement income.

The risk of more pension pots being left unclaimed will be heightened over the  coming years as some ten million people begin paying into workplace pensions for the first time. Under the automatic enrolment reforms rolled out last October, all employers will be obliged by 2018 to enrol employees into a workplace pension.

It’s estimated that at least one in three will exercise their right to opt out of those pensions, yet automatic enrolment will create millions of new small savings pots.

By 2020 the government estimates that there will be 50 million dormant pensions, including 12 million worth less than £2,000 and 33 million less than £10,000.

The new system would slash the proportion of people reaching retirement with five or more dormant pension pots from a  quarter to just one in 30, it claimed.

Tom McPhail, head of pensions research at Hargreaves Lansdown, said: “The fewer pension pots you have, the easier it is to take control of your retirement savings and plan your pension income effectively.”

The growing problem of small pension pots being left unclaimed is not the only reason behind the move. Experts point also to the greater efficiency of allowing savings to build up in larger fund with one set of charges.

“If it can be done simply it can only be a good thing if moving pension funds has no significant cost or fund disadvantages,” said Graeme Mitchell, managing director of  Lowland Financial in Galashiels.

The new system would also make it easier for retirees to secure a decent pension income, as it can be difficult to obtain an annuity quote for modestly sized pensions.

As it stands, different pension pots can be cashed in provided their combined value is below £18,000. “Stranded” occupational  pension pots worth less than £2,000 can also be cashed in, while rules introduced last April allow over 60s to do the same with non-occupational pensions valued at no more than £2,000.

“I regularly see people with tiny funds from years ago who want to simplify things but for whom it’s simply not cost-effective enough to advise on consolidating them,” said Mitchell.

“It would be ideal if you could have one scheme for life, but that way every employer would have to fund a potentially infinite number of pension schemes so this makes some logical sense for smaller pots.”

Pot follows member would at first apply only to defined contribution schemes, into which most private sector scheme members now pay following the dramatic decline in final salary schemes.

Transfers must meet certain conditions too. For example, the pot must have been created after a certain date, while the transfer can only happen once all contributions have ceased and the individual has left the incumbent employer.

But there are fears that some workers could end up paying far higher charges and be shifted into inferior schemes when their pensions are automatically transferred.

Darren Philp, policy director at the National Association of Pension Funds (NAPF), warned that “pot follows member” could put workers’ savings at risk.

“We are concerned that a worker’s pension could be automatically shunted from an excellent pension into a bad one with high charges.

“The government now recognises this, but we cannot be sure there will be strong safeguards in place,” he said.

Philp wants small pension pots to be automatically shifted into a small number of large-scale, low-cost pension schemes.

“This would also remove the bureaucracy and expense that pension schemes will face when trying to ensure that a pot follows a worker automatically.”

The risk of losing money to charges or of moving to a poor scheme means some  people will better off exercising their right to opt out of automatic transfers.

Pension charges are becoming increasingly competitive – at least on newer schemes – but the cost of moving to a pension even slightly more expensive can build up over time.

Take an employee with a pension pot of just under £10,000 in a scheme with an annual management charge (AMC) of just 0.5 per cent. If those savings were automatically transferred to a scheme with an AMC of 0.9 per cent, they would pay an extra 10 per cent of their savings in charges over 25 years, according to the NAPF.

There are concerns, too, that workers could lose valuable benefits upon transferring – such as guaranteed investment returns but the plans set out by the government seek to mitigate this.

Employees will also need to ensure that the investments in the new plan are at least as good as the existing ones, Mitchell pointed out, while there will be extra considerations for older workers.

“From, say, 50 onwards as pots get bigger and you are more concerned about protecting and accessing the funds there can be  better options.”

• To track down a “lost pension”, contact the Pension Tracing Service, which is free, at www.gov.uk/find-lost-pension or by calling 0845 600 2537.