THE government has announced a huge shake-up to pension schemes that aims to add over £11,000 extra to a typical retirement pot.
In the King’s Speech today, it was confirmed the government will introduce a new Pension Schemes Bill which will aim to improve outcomes for savers in retirement.
The Bill will include a raft of new measures to help over 15 million savers to get better outcomes from their pension savings, according to a document published today.
The aim is to ensure the average earner has over £11,000 more in their pension pot by the time they retire.
It comes as data suggests millions of savers are not putting enough money aside for later life.
Think tank The Resolution Foundation has estimated around 13million people are currently not saving enough to meet the minimum target for an adequate retirement.
To help pension savers, the Pension Schemes Bill will include the following changes:
The government estimates that combining small pension pots, guiding savers on which retirement products to use and introducing a “value for money” framework may lead to around 9% higher pension pots at retirement for an average earner.
Tom Selby, director of public policy at pension provider AJ Bell, said the new Pension Schemes Bill will also use millions of people’s pension pots to drive investment in the UK, boosting economic growth long-term.
“The claim the measures could deliver bigger pensions needs to be taken with a pinch of salt, as ultimately this will depend on the performance of your investments,” he said.
“It is, of course, possible that this package of reforms will result in better investment returns for members – but this is never guaranteed.”
Simon Kew, head of market engagement at pension consultancy Broadstone, said the Pension Schemes Bill was a “surprise inclusion” in the King’s Speech, but follows on from work carried out by the previous government.
“The government’s analysis suggests that it will increase pot size at retirement by as much as 9% for the average earner contributing to a pension over the course of their career which will be a major boost for savers,” he said.
“There is also a strong focus, as expected, on the productive investment of pension money, but that may be a tougher nut to crack in the short term.”
We have broken down some of the policies in the Pension Schemes Bill below and what they mean for savers.
In a document published today, the government said it will aim to prevent people from losing track of their pension pots by consolidating “small pots” automatically.
“This will enable an individual’s deferred small pots to be
automatically brought together into one place to maximise income in
retirement, and deliver value for every saver,” it said.
Millions of people are estimated to have lost track of significant sums of money in old pension pots.
Recent research by provider PensionBee found around one in ten workers believe they are missing a pension pot worth £10,000 or more – equating to more than three million Brits.
Mr Selby said: “The government is intent on pushing forward with greater consolidation of pension schemes, in part to improve the value members receive and in part to help deliver greater levels of investment into the UK.
“For individuals, there can also be benefits to taking control and combining your retirement pots, including potentially lower charges, more choice and easier administration.”
The Pension Schemes Bill will bring in a new “value for money” framework, which will require pension schemes to pass a standardised test to demonstrate they are delivering value.
“This should result in consolidation in the pensions market by leaving a smaller number of well- performing, well governed schemes which will not only improve outcomes for savers, but is likely to lead to more productive investment of funds,” the government said.
The City watchdog, the Financial Conduct Authority, will be responsible for ensuring this is applied consistently across all pension schemes.
One of the more radical plans in the new Bill is the proposal that pension schemes must offer retirement products to savers.
The Department for Work and Pensions (DWP) has previously confirmed its intention to make trustees have a legal duty to provide a default retirement product for savers who don’t make an active decision themselves.
But the government has now confirmed it will place duties on pension scheme trustees, who manage pension schemes, to offer pension savers options about how to take their income when they retire.
Recent research has found that almost three quarters of savers withdrew money from their pension before they actually retired.
The research by Scottish Widows found savers typically took out £47,000 before leaving work, meaning they had less for later life.
The intention is that by offering products to savers will keep them invested for longer rather, meaning their pension pot will continue to grow.
“This will improve outcomes for savers and is likely to lead to more funds being invested for longer, giving the potential for investments in productive assets – boosting economic growth,” it said.
Kirsty Anderson, retirement specialist at Quilter, said: “By placing duties on trustees of occupational pension schemes to offer a retirement income solution or range of solutions, including default investment options, the government hopes to improve outcomes for savers and lead to more funds being invested for longer.”
WHILE many of the plans confirmed today were already in the works, confirmation that these plans will happen via the Pension Schemes Bill is a huge win for pension savers.
It’s widely acknowledged that millions of workers are simply not saving enough for retirement and aren’t engaged with their pensions, but action to tackle this has been slow.
So, any further measures that could help to boost savings and encourage people to plan for later life should be warmly welcomed.
While the pensions dashboard – which will allow savers to view all their pensions in one place – is finally on the horizon after repeated delays, it is still over two years away, but we need to take action to improve retirement savings now.
The consolidation of small pots could contribute to helping savers keep track of their cash, while requiring schemes to provide retirement solutions for savers makes sense.
With hardly any savers able to access proper financial advice, this could help ensure they aren’t left floundering.
The government has previously said it will carry out a review into workplace pensions at some point during this term, so hopefully that will lead to even more radical measures in future.
Laura Purkess, consumer features editor and consumer champion, The Sun
The documents published today also confirmed plans to consolidate some defined benefit (DB) schemes to help protect savers and boost investment.
DB schemes, also known as “final salary” schemes, are where savers receive a guaranteed income for life once they retire.
But many savers in old DB schemes are at risk of losing part of their income if their employer goes bust, the government said.
By combining some of these funds into “superfunds”, employees would be more protected from any issues with their company.
It also said combining the funds would enable “more productive investment” of the pension cash.
“DB schemes hold around £1.4trillion in assets across around 5,000 pension schemes. The measures in this Bill will enable consolidation and more productive investment of funds,” it said.
While the Pension Bill included a lot of detail, experts have noted several expected policies are absent from the King’s Speech.
One of those is changes to automatic enrolment, which is where savers automatically join a new workplace pension when they start working for a company.
Experts have been expecting the government to address the shortfall in retirement savings by changing the amount savers have to earn to be automatically enrolled, as well as lower the minimum age from 22.
Mr Selby explained: “One key thing missing from this Bill is any mention of scaling up automatic enrolment.
“There is wide agreement that minimum contributions under auto-enrolment will need to rise, and a 2017 review recommended removing the lower earnings band and reducing the minimum qualifying age to 18 as a starting point.
“The legislation for these changes is ready to be delivered – the big question is when will it happen? By removing the lower earnings band, savers will benefit from an extra £500 a year into their pension, which would make a big difference.”
Tom McPhail, director of public affairs at consutlancy The Lang Cat, added that most of the current plans were already in progress and new plans could come further down the line instead.
“This means work has already been done on them, they’re relatively uncontroversial and should enjoy support from employers and the pensions industry,” he said.
“It appears any more radical reforms to the pension system will wait until the government has completed the review it promised during the election campaign.”
WE round-up the main types of pension and how they differ: