Labour has outlined plans for huge changes to pension schemes as part of the King's Speech today.
The Government will introduce a new Pension Schemes Bill and says this will benefit around 15 million savers and give the average person over £11,000 more in their pension pot by the time they retire. This includes a way for small pension pots to be automatically consolidated, so it minimises the risk of savers losing track of their retirement cash.
There are three main options being considered for managing small pot consolidation, including a pension pot that follows you from job to job, a single default consolidator where all your pension pots are moved to a single entity, or a way where small pots are divided among multiple consolidators.
Tom Selby, director of public policy at AJ Bell, 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 UK Plc. 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 Pensions Schemes Bill also includes plans to ensure defined contribution pensions are demonstrating value for money through a standardised test, with framework provided by the Financial Conduct Authority (FCA). Defined contribution is where both yourself and your employer pay into your pension scheme, with the money invested by your pension provider so it grows over time. Pension schemes will also have to offer retirement products, including default investment options, as part of the changes announced today.
Other changes include updating the definition of a "terminal illness" to allow eligible savers to receive a lump sum payment earlier and strengthening the power of the Pensions Ombudsman to help reduce costs. But noticeably missing from the Pensions Schemes Bill was any mention of changes to the auto-enrolment age.
Auto-enrolment is where you're automatically placed into your employer’s workplace pension. Under the current rules, you must be between the age of 22 and the state pension age, and earn above £10,000, to be opted in by law. But changes to the scheme will see workers auto-enrolled when they turn 18.
The lower earnings limit - the minimum level of earnings on which you and your employer have to pay contributions - is also being abolished. The limit is currently set at £6,240. Tom Selby said: “The legislation for these changes is already in place – but the big question is when will it be put into practice? By removing the lower earnings band, savers will benefit from an extra £500 a year into their pension, which would make a big difference over the course of a person’s lifetime.”
Meanwhile, no further updates on the pensions dashboards were given today. The pensions dashboard will allow people to view all of their pension information - but its rollout has been repeatedly delayed. The first connections to the national pensions dashboard are scheduled to begin in August 2024, with all schemes legally required to be connected to the system by October 31, 2026 at the latest.