The creation of a pension pot for life could help increase savings and eradicate the problem of multiple pensions, a think tank has said.
It would also give savers more consumer choice and control over their pensions, the Social Market Foundation (SMF) said.
In the Autumn Statement, the Government set out plans for one pension pot for life, instead of employees opening multiple pensions whenever they move jobs.
Millions of pensions pots contain less than £10,000
Since auto-enrolment was introduced in 2012, many more savers now have private pensions but this also means they may have multiple pots to which they are no longer contributing.
As employees have to opt out of auto-enrolment, this means there are around 20 million of these small pots with less than £10,000 in.
The system of multiple pots means it is harder for someone to keep track of their pensions and it’s predicted that around 2.8million of these pots are ‘lost’ and the saver doesn’t know details such as who their provider is or how much is in the pension.
The number of these pots is projected to grow to 27 million by 2035, if no changes are made by then, the foundation said in a paper addressing the issue, and it has risen 75% in the last four years.
But by creating one single pension, the foundation said people will be able to have more money in retirement as there won’t be the risk of ‘losing’ a pension because they will only have one to keep track of.
The paper written by Michael Johnson at the think tank also argues that people with a workplace pension should have the choice over the scheme and provider they, and their employer, pays into.
It also said the pensions industry loses around £225m every year on administering these smaller pots.
These plans are currently out for consultation but the Department of Work and Pensions (DWP), has said one pension pot would be the best way to deal with the current problem of multiple pots.
‘Enhancements’ and ‘natural evolution’ to auto-enrolment
Michael Johnson said: “The introduction of member choice, focused on arresting the ongoing flow of new small pots, would complement the DWP’s proposal for consolidators to help reduce the existing stock of small deferred pots. Both initiatives should be viewed as enhancements to, and natural evolutions of, the auto-enrolment regime.
“Member choice would also represent a significant stepping stone towards a single (pensions) pot for life, facilitated by common sense and digital capability. Simplicity to the fore.”
Minister for Pensions, Paul Maynard, said: “The Social Market Foundation’s report provides an interesting perspective on the benefits of member choice and a single pot for life approach.
“I would encourage all of industry to engage in this discussion and respond to the DWP’s Call for Evidence on the matter – to help inform the development of a longer-term pensions policy. My objective will be to ensure that the interest of savers and their outcomes in retirement remains at the heart of our decisions.”
