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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

Operation 'big fat pension pot': what it means for you

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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3 comments so far. Why not have your say?

Tortoise

Jun 26, 2012 at 19:53

The government wants you to have one big pot which makes it easier for it to dip its paws into rather than a lot of small ones.

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Philmo

Jun 27, 2012 at 15:08

There is that risk Tortoise - wouldn't be the first time! The post war labour gov got it's hands on the huge teacher's fund in exchange for guarranteed perennial defined benefits out of tax revenue. To be fair they needed the cash to rebuild UK, but as ever, it's increasingly costing all tax payers dearly.

But at least having one huge pot puts us all on the same basis so there'll be an end to the current sqabbling between public and private sectors and we can all focus on the crucial task of persuading our self interested politicians to govern for the longer term.

If people want to make additional provision for retirement, that can be done privately.

I think it's important that the One Pot is at least a partially funded setup so that the peaks of expenditure are rounded off and do not present painful spikes of a burden to our children and grandchildren.

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A Sick SIPP Owner

Jun 27, 2012 at 22:25

Consider:

If you have a large 'pot' then the GAD limits you to (possibly) just enough to stop the 'capital' increasing so the government can take the 55% before adding the rest to the 'estate' for estate duty.

If you have lots of small pots, then you may be able to get them back as 'cash' on your retirement.

If you have lots of 'pots' then all will incur 'management' fees (basic monthly charge added to a % fee. so you will see the small pot go to the 'management' insurance? company.

With a single 'large ' pot at least the basic fees will be far less than the % part of the fees, and remember, not only is the government taking 10% of the divi's but it the government will also take tax - corporation and PAYE from the management company.

Back to considering many small vs 1 large pot:

Many small mean that you can spread the 'risk' over many 'management companies, advisors, and investment placements .

1 large pot and you cut down on the fees, but it can all go if the management organisation goes bust - and the FSA's regulation has not ensured the company and advisors acually have, and maintain appropriate insurance.

Then again, what industry would you consider a good safe idea - property, banks, government debt, petrol, gas, electricity - water maybe, holiday lets in spain, italy, greece, turkey.

One problem and all your pot could be gone!

And remember, when you do retire, what you can do with the pot is controlled by the government.

Me, I really wish I had not taken the tax break puting my spare cash into a pension pot, but just put it into ISA's etc. spreading the selection of stocks around the various sectors of the market, and the cash bit into long term, tracker based savings - BoE, or RPI based .

That way, I could use the savings for maintenance of my property and lifestyle, helping the relations - whatever is needed instead of being limited to 3% GAD (less than an instant access account) and seeing my investment savaged by the regulators actions, and then declared TOXIC by the legally unassailable FSA management despite other similar funds returning 5% plus even after the effect on the fund of the TOXIC declaration..

Note - a selection of USA overnment guaranteed policies from a variety of insurers is TOXIC, but an annuity from a single UK based insurer is perfectly safe - presumably because, despite not getting any government guarantee on the policy/annuity, that organisation will be paying tax to the UK government on the relatively enormous profits from undervaluing the 'pot' - yes - check the relative annuities from USA and Canadian insurers against those from UK ones!

Rant paused

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