Pot for life: Would you rather continue saving in the same pattern, no matter how often you change jobs?
Savers will be allowed to open a “lifetime pension pot” into which all current and future employers can contribute under government plans that may be announced in the Autumn Statement tomorrow.
The move is reportedly part of a wider package of pension changes aimed at using the country’s retirement savings to boost Britain’s economic growth.
But the “pot for life” proposal divides pension experts.
Many have welcomed the idea, comparing it to a bank account, but former pensions minister Steve Webb describes it as “a blow-up for the entire workplace pension system”.
People who automatically enroll in a pension currently earn many different pension benefits over the course of their lives, as each employer selects and runs its own scheme – or outsources it to a specialist provider.
Instead, the option of choosing a pension pot that lasts you for life – which we wrote about in detail last month – has been discussed for some time as a way to curb the huge amount of money created every time someone gets a new job starts.
The government is also considering “standard consolidation,” where lost small pots will eventually be placed with an approved provider until they can be reunited with their owners.
How would a “pot for life” work?
According to Tom McPhail, director of public affairs at research firm Lang Cat, it would effectively be “Auto Enrollment 2.0.”
Initially, the employee would only have the right to choose his own pension and have the contributions paid in by his current employer, he says.
“In the long term, it could also mean changing the auto-enrollment system.”
“We want to improve auto-enrolment by making Pot for Life the default option for all corporate pension savers.”
When you start a new job, your contributions will be transferred to your existing “lifetime pot” unless you have chosen otherwise.
Unless you already had a lifetime pot or say otherwise, your contributions would go to your employer’s standard pension provider instead.
Meanwhile, employers currently transfer pension contributions for all their employees to a single provider and do not want to start making payments to a variety of schemes.
To get around this, there would probably need to be a single clearinghouse that would become the new recipient of all pension contributions and would then be responsible for redistributing them.
And all pot-for-life providers would need to be licensed and regulated for suitability to ensure people’s money is managed properly and they are not overcharged.
Would “pension pots for life” be a good offer for savers?
Wealthy pension savers would be wooed for their business, while a remainder of less “profitable” savers could end up worse off.
Questions have also been raised about fees and how easy it would be for individuals to choose the best “pot for life” for their needs.
There’s also the question of whether a scheme that might be a good option for you in your 20s will still be suitable as you approach retirement
“Regulation would be needed to prevent cream skimming of wealthier customers,” warned Phil Brown, policy director at pensions provider People’s Partnership, when we recently examined how the system might work.
The government cannot be allowed to play fast and loose with the rules just because it has an election in mind a year from now… A system overhaul announced 24 hours in advance can only produce one result; chaos
Mark Futcher, Barnett Waddingham
“It would be important for all providers operating in a Pot for Life market to be required to serve all customers.”
Steve Webb, partner at LCP and This is Money’s pensions columnist, said: “Company pensions are currently a ‘wholesale deal’, with employers negotiating good value for money for their entire workforce.”
“As a result, the average company pension contribution is currently less than 0.5 percent.” If the system were to be fragmented, employers would lose this large purchasing power.
“Top earners would be bombarded with marketing as the pension insurance providers would try to pick out the most profitable company.” But the remaining employees would no longer have access to such a good company pension.”
Webb also raised the question of how easy it would be for individuals to compare different pensions.
“We are told not to just focus on costs and fees, but do we really expect consumers to evaluate the different investment strategies of their different pension providers?”
He adds: “There are much simpler ways to deal with the problem of small or lost pension funds, such as the idea of the pot following the member as people change jobs, rather than dynamising the entire workplace pension system.”
Pensions consultant Barnett Waddingham has pointed out that managing a pot for life scheme would be challenging because it is embedded in the workplace – and pensions, for example, do not have all the account numbers and sort codes that bank accounts do.
A pension could become something like a bank account that different employers can pay into. This is good for savers because they have more influence over how they want to expand their retirement savings
Becky O’Connor, PensionBee
A partner at the firm, Mark Futcher, said: “A sudden move to a ‘lifetime pot’ risks people choosing a sub-optimal pension plan, being influenced by marketing over value and ultimately exacerbating the UK’s pensions crisis .”
“Furthermore, the alleged move to a nominated scheme would not necessarily solve the problem of savers having multiple savings pots, or meet the government’s desire for large schemes investing in high-growth UK assets – that seems a loss, a loss, a loss To be a loss.” Politics.
“Pension saving is naturally a long-term problem. The government must not be allowed to move too quickly with the rules just because it has an election in mind in a year’s time.
“For a lifetime pot to work, there must be a robust central clearinghouse, a functioning pensions dashboard and a flawless administration system that guides contributions and reinforces the critical role of employers in ensuring value and good governance.” One System overhaul announced 24 hours in advance can only result in one thing: chaos.’
But Becky O’Connor, director of public affairs at PensionBee, says Pot for Life would be a great solution to the problem of people having lots of old pensions from multiple jobs.
“A pension could become something like a bank account that different employers can pay into.” This is good for savers as they have more influence over how they want to grow their pension savings and hopefully a sensible solution to the problem of lost pension savings offers.
[A clearing house] won’t be cheap, so the next obvious question is how much might this project cost and who will pay for it? …There is every chance that Keir Starmer’s party will have the final say on whether these reforms ever see the light of day
“Pot for Life has the potential to shake up the industry, bring what consumers actually care about, increase competition and bring the way people approach pensions into the 21st century. “
Tom Selby, head of pension policy at AJ Bell, said: “Proponents of ‘Pot for Life’ reforms argue that giving savers the chance to choose their workplace pension scheme – and then naming that scheme – would help. so that it receives their contributions when they change jobs.” the problem of lost pensions.
“Employees would also potentially benefit from greater choice and flexibility, while the broader auto-enrollment market would currently face comparatively weak competitive forces.”
“The biggest sticking point with these proposals is the burden on employers.” Currently, British companies of all sizes – from corner shops to multinationals – are required to set up a company pension scheme for their employees.
“There would therefore need to be some kind of clearinghouse to route membership fees to multiple systems, with sophisticated processes so that companies can network easily.”
“This won’t be cheap, so the next obvious question is how much could this project cost and who will pay for it?”
Selby says a “call for evidence” to explore the pros and cons would be a sensible approach.
And he adds: “With the general election so close and Labour’s significant lead in the polls, there is every chance that Keir Starmer’s party will have the final say on whether these reforms ever see the light of day.”
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