DWP ‘£1,000 rule’ change could affect 20 million pension pots

The Department for Work and Pensions is making major changes to the pensions system

Savers are being made aware of a significant Department for Work and Pensions proposed overhaul of the pension system. Official government proposals could see millions of small workplace pension pots automatically merged under a £1,000 ‘rule’.

There are currently more than 13 million workplace pension pots valued at less than £1,000. The DWP states that these amount to a combined total of £4bn in retirement savings, with an additional 1m pension pots being created every year.

Now the DWP has launched a consultation examining how a new framework for consolidating small pension pots might operate. The scheme is intended to be in place by 2030 and could have an impact on 20 million pension pots.

Here, consumer watchdog Which? takes a closer look at the DWP’s initial proposals, and considers what they could mean for your retirement savings.

The DWP has put forward a number of initial proposals. The pension pots earmarked under the plan would be those established since ‘automatic enrolment’ was introduced on October 1 2012, with the focus falling on pots held within defined contribution pension schemes. The funds would also need to be held in a charge-capped ‘default fund’, reports the Mirror.

While this sounds complex, it is the standard investment arrangement you are automatically enrolled into if you have not actively selected your own investments. The term ‘charge-capped’ refers to a legal ceiling on the fees that can be levied.

The initial rollout would target small, dormant pensions which: are valued at £1,000 or less; have not received any contributions for at least the previous 12 months. Older pensions in a very small scheme – one with no more than 100 members – or schemes currently winding down will be initially exempt from automatic consolidation, according to the proposals. When the scheme officially launches in 2030, the government estimates that approximately 20m pension pots will fall within scope.

For more on ISAs v pensions, Which? has advice here.

Many savers will be questioning whether it is worthwhile waiting until the new system is operational, or whether they should take action now. Which? has examined both sides of the debate.

6 reasons to consolidate sooner

• Take control of your investments – managing funds in many different pensions is more difficult than having fewer pots.
• Take advantage of an age 55 protection – if one of your existing pots has a ‘protected pension age’ of 55, transferring your other pensions into it may let you access all your money two years early.
• Improve your returns – Which? says that consolidating lets you shift your money to a scheme with a better-performing fund after charges.
• Simplify admin – Which? says that having one pot makes it much easier to keep track of your retirement savings.
• Stop multiplying fees – if your pensions charge a fixed, pound-based administration fee, having multiple pots means you are paying that fee several times over.
• Get better tech – moving your money into one scheme can give you access to a better app or online portal to more easily check your balance and make extra contributions in one place.

6 reasons to delay consolidation

1. You may be hit with exit fees – some older schemes charge you a penalty for moving your money before your agreed retirement age
2. You could pay for options you don’t need – moving to a self-invested personal pension (Sipp) might give you thousands of investment choices, but you would pay higher charges.
3. You could lose an age 55 protection – if you transfer your money out of a pot that currently lets you access your money at 55, you will lose that option and instead have to wait until you are 57.
4. You might give up a good workplace scheme – some workplace pensions have very good benefits or very low fees.
5. The cost of waiting is small – if your dormant pots are very small, slightly higher charges will not do massive damage to your retirement.
6. You could lose valuable guarantees – older pensions can have perks like the ‘Guaranteed Annuity Rate’ (which pays a much higher retirement income than you can get today) or built-in life insurance. You would lose these if you move.

For more on consolidating your pensions, Which? has advice here.