Pot for life: Would having one pension all your employers would pay into be a better or worse deal for savers?
Savers could be given the legal right to ask employers to pay pension cash into an existing pot rather open a new one every time they change jobs under plans announced by the Chancellor today.
Jeremy Hunt will launch a consultation on the proposal, which could lead to savers having ‘one pension pot for life’, he confirmed in the Autumn Statement.
The move was floated in recent days, but the ‘pot for life’ proposal divides pension experts and has already prompted a fierce debate over whether it will prove a good deal for savers.
We explain below how it would work and why it is controversial.
What pension changes are on the way
The ‘pension pot for life’ is part of a wider package of changes aimed at using the nation’s retirement savings to boost UK economic growth.
They include encouraging pension schemes to plough more of members’ retirement savings into higher risk UK investments, and consolidating smaller defined benefit pension schemes.
‘These reforms could help unlock an extra £75 billion of financing for high-growth companies by 2030 and provide an extra £1,000 a year in retirement for an average earner saving from 18,’ said Hunt in the House of Commons today.
Regarding ‘pot for life’, he added: ‘I will also consult on giving savers a legal right to require a new employer to pay pension contributions into their existing pension pot if they choose, meaning people can move to having one pension pot for life.’
How would a ‘pension pot for life’ work?
People auto enrolled into pensions currently acquire many different pots over a lifetime, as every employer chooses and runs – or outsources to a specialist provider – a separate scheme.
In changes dubbed ‘auto enrolment 2.0’, workers would initially get the right to choose their own pension and get contributions paid in by their current employer.
But eventually whenever you started a new job, your contributions would be sent to your existing ‘pot for life’, unless you chose otherwise.
That means some would stay with their employer’s in-house or outsourced pension scheme.
To get around the problem of employers having to send pension contributions for all their staff to a myriad of schemes instead of just one provider, a ‘clearing house’ system has been suggested by proponents of pots for life.
This would become the new destination for all pension contributions, and then be responsible for redistributing them.
All ‘pot for life’ providers would have to be approved for suitability, and regulated to ensure people’s money was being looked after properly and they weren’t being overcharged.
The system is also seen as a way of curbing the vast number of pension pots now being created every time people start a new job.
The Government has also been looking at ‘default consolidation’, where lost small pots would eventually be placed with an approved provider until they can be reunited with their owners again.
Plans along these lines might continue in tandem with the introduction of pension pots for life.
Why are pension pots for life controversial?
Wealthy pension savers would be wooed for their business while a rump of less ‘profitable’ savers might end up worse off.
Questions have also been raised about charges, how easy it would be for individuals to pick the best ‘pot for life’ for their needs, and the risks of scams and mis-selling scandals.
There is also the issue of whether a scheme that looks a decent option when you are in their 20s will still be suitable as you approach retirement.
Critics argue that employers are better placed than individuals to choose a decent pension scheme, and can use their scale to keep costs down and give staff a better deal.
Others have asked who will pay for a clearing house, which could be expensive if it is to reliably process potentially millions of pension contributions.
