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Operation 'big fat pension pot': what it means for you
The government wants you to have one big pension pot that you can take from job to job. But will the plan mean for you?
by Michelle McGagh on Jun 26, 2012 at 14:33
The biggest pension problem we face as a nation is that we are not saving enough. But the second biggest problem is that we are saving small amounts into lots of different pots that we lose track of, or don’t bother with because the amount is so insignificant.
The pensions minister Steve Webb has already set out his intentions to help people create a ‘big fat pension pot’ from their small pension pots, joining up all the little pockets of money into a more substantial sum.
Webb has said previously that he is concerned that people are at risk of losing their small pension pot at they move from job to job.
‘I do not want to see people who are doing the right thing by saving ending up with very little for their retirement because the system is too complicated. I want to make it as easy as possible for people to grow big fat pension pots,’ Webb said at the end of last year.
The problem of small pots is set to grow as the UK workforce becomes more mobile and the introduction of auto-enrolment into a workplace pension for those who don’t already contribute will lead to 4.7 million new small pots by 2050.
Figures from the Association of British Insurers (ABI) predict by 2017 there will be 370,000 pension pots of less than £2,000.
What’s the solution?
The solution to the small pots problem isn’t easy, but the government is looking at introducing more mobility into pensions, meaning your pension pot could follow you from job to job instead of a new employer starting a new scheme every time you change job and your old pension languishing with your old employer.
Workers have already shown support for mobile pensions. A survey by the ABI showed 58% of people want their pension to move automatically with them as they move employment. Another 17% wanted to see all their pensions in one central place; 15% would like their pot to stay where it is; and 10% would like their pot to automatically move to a central scheme, with a new pot started by the new employer.
The ABI said: ‘The ABI strongly supports the government’s intention to address this problem. We believe savers, and society as a whole, would benefit from a mechanism which encourages people to merge the small pension pots they acquire during their working life.’
Why does it matter?
The government has said it is worried that people are forgetting about small pension pots they may have accumulated over their working life, which means when they get to retirement they are missing out on income. Regardless of how small the income would be from the pot, we will all need all the help we can to find enough money to sustain us in retirements that could last 30 years.
By combining all the small pots into a ‘big fat pot’ you are less likely to leave it stranded and you will have a larger lump sum when you do retire, which means you will be able to get a better deal on your annuity.
‘The number of lost or stranded pots could be reduced, and people would benefit from greater choice when buying a retirement income due to a larger pot. Helping people merge their small pension pots and reducing the number of pots could also help them engage with their pension saving, particularly new savers who have never saved into a pension before,’ said the ABI.
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