A ‘lost’ pension pot is defined by the PPI as one that is managed by a pension provider that is unable to contact the owner.
Almost 3.3 million pension pots are now considered lost, containing an average sum of £9,470, rising to £13,620 among people aged 55-75, according to the Pensions Policy Institute (PPI).
A combination of people switching jobs and automatic enrolment into workplace pensions is behind the increasing number of lost pensions.
Earlier this week, pensions minister Emma Reynolds repeated the Government’s commitment to developing the pension dashboards, which should make it easier for savers to locate old pots and combine pensions.
Rachel Vahey, head of public policy at AJ Bell, said: “Lost pension wealth has now hit a staggering £31.1bn, according to the Pensions Policy Institute (PPI). This means millions of people could be in danger of facing an incomplete picture when it comes to their long-term financial planning, potentially missing out on thousands of pounds of disconnected pension money.
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“Knowing how much they have saved in a pension, and where that money is invested, is one of the most important steps savers can take to maintain a level of control over their future retirement. Only by having this overall picture can pension savers work out how close they are to achieving their financial goals, and what action they may need to take to get their desired income and standard of living in later life.
“The Government is on the road to helping people achieve this. Pension dashboards, once launched, will allow savers to see all their pensions in one place online, reuniting them with their lost pension wealth. But while we wait eagerly for dashboards to launch, there are important steps people can take today to track down their lost pensions and boost the overall value of their pension savings.”
How to find and combine lost pensions
Pension providers and employers should send you a statement setting out an estimate of the income you are likely to receive in retirement each year. If you’re not getting these, perhaps because you’ve changed your address or changed jobs, then it’s time to hunt down your pensions.
Contact your pension providers first of all. If you don’t remember who these are, you could contact your previous employers or use the Government’s Pension Tracing Service. Aviva and AJ Bell both also offer pensions tracking tools.
There are plenty of reasons why combining your pensions with a single provider can be a good idea. A single retirement pot is much easier to track and manage than having various pensions with different providers.
Combine pensions to save cash
You could also benefit from lower costs and charges, increased income flexibility and more investment choice by switching providers.
While a charge cap of 0.75% applies to the default investment option in auto-enrolment workplace pensions today, many pension policies, including older contracts or those set up outside auto-enrolment, may carry higher fees.
The impact of reducing your pension charges can be significant, particularly over the long term. For example, according to calculations by AJ Bell, someone combining three pensions with charges of 1.5-0.75% could boost their pension pot by more than £7,000 over 10 years or £20,000 over 20 years if they were to switch to a single, lower-cost account.
If you decide to consolidate ‘defined contribution’ pensions – where you build up a pot of money that you can access from age 55 – the process should be relatively simple.
If you have a ‘defined benefit’ pension valued at £30,000 or more, you will need to take regulated financial advice before transferring. Defined benefit schemes provide an income for life from a set date, usually based on your salary and the number of years you have been a member of the scheme. Lots of providers will only accept a transfer from your defined benefit scheme where the adviser has recommended you do this.
To combine pots, you need to choose a provider with whom you want to consolidate your pensions and get the details of the pension or pensions you want to transfer over. Once you’ve given the relevant details to your new provider, it should do all the legwork for you.
Before transferring any old pensions, you should check there aren’t any valuable benefits attached that you may lose or exit charges that will be applied. Your provider should be able to tell you if this is the case.
You will then need to choose where to invest your pension. When doing this, make sure you are comfortable with the risks you are taking, have a diversified selection of investments and, crucially, keep your costs as low as possible.