Updated 03 December 2020
UK workers have lost track of up to 1.6 million workplace pension pots, according to the latest estimates. A lack of understanding of how to manage pension savings could result in many people being substantially worse off in retirement. Article by Nick Green.
Failure to keep tabs on old workplace pensions has led to billions of pounds worth of savings being misplaced or forgotten about, according to The Association of British Insurers (ABI). The ABI estimates put the figure at around £19.4 billion, comprising 1.6 million pots with an average size of £13,000.
Pension pots can be ‘lost’ when an employee moves jobs and ends their membership of that particular workplace pension scheme. Pots can usually be transferred to their new workplace pension scheme, but in many cases workers neglect to do this and simply leave the money where it is. There is nothing wrong with doing this, as the pot is still in their name and they can still access it from the age of 55. This is sometimes known as a ‘frozen pension’. But problems can arise in the future, particularly if the person moves home without notifying the pension provider. Without the reminder of regular annual statements, they may forget about that pension pot altogether. Moving home is the most common cause of pensions being forgotten, but there are others – including the death of the holder, leaving their partner or beneficiaries unaware that the pensions exist.
Another problem of having inactive pension pots lying around is that – even if the holder knows they exist - they may be languishing in underperforming schemes. This can result in the holder missing out on thousands of pounds worth of potential growth over time. Jamie Jenkins, head of global savings policy at Standard Life Aberdeen, says that too many workers are becoming ‘disengaged with details such as how much [their pensions] are worth and where the money is invested’.
People who suspect they may have old pensions from previous jobs can track them down by contacting the Pension Tracing Service (a free government service) on 0800 731 0193.
Once pensions have been tracked down it is often (though not always) a good idea to consolidate them into a single pot. There are exceptions to this, for example where one pension has special benefits that would be lost on transfer (such as a guaranteed annuity rate).
The problem of pensions being misplaced or forgotten about is expected to worsen in the wake of auto-enrolment. Since this was introduced in 2012, more UK workers are enrolling in pension schemes than ever before. However, this does not mean that workers understand their pensions any better, as pensions advice specialist Portafina has discovered.
In Portafina’s 2019 research, 47 per cent of employees admitted to not knowing how auto-enrolment works, while 1 in 7 confessed that they didn’t even know what it means. In addition, a third of workers did not know how much their paid into their pension each month. Most also significantly underestimated how large a pension pot they would need to achieve the living wage of £15,269 a year in retirement.
Recent increases to minimum workplace pension contributions should mean millions are better prepared for retirement than they would otherwise be. However, it remains up to individuals to educate themselves about where their money is being invested and how they can keep track of it.
Jamie Smith-Thompson, managing director at Portafina, said, ‘It’s worrying that so many people still don’t understand what a pension is. Auto-enrolment means you will be saving into a pension without having to think about it. Which is great on one hand, but it could mean you have questions about where your money is going or how it is being invested.
‘There are people that can help you understand pensions, such as The Pensions Advisory Service who can offer you guidance and cover the pension basics. Or if you want to talk about how your money is invested you should speak with an independent financial adviser who is regulated by the FCA.’
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