‘Small pots’ pension consolidation takes a step forward

02 May 2025

The government has announced an initiative to combine millions of small pension pots to boost pension savings and administration efficiency.

A pension pot is the money an individual has saved into a defined contribution pension scheme. From age 55 (rising to age 57 in 2028) this money can be taken as a lump sum, used to set up a retirement income solution, or a combination of both.

The government initiative is in response to the fact that there are around 13 million UK pension pots worth £1,000 or less. Many of these will be ‘forgotten’ pension pots where someone has moved jobs and lost track of their savings in a pension with their previous employer.

Concerns about this situation include:

• Where someone has more than one small pot, they might not be getting the best rate of return.

• Pension savers may be paying multiple flat rate charges across each scheme.

• Having multiple pots can make it more difficult than necessary to keep track of your pension savings.

In addition, the government estimates that it is costing the pensions industry around £225 million in unnecessary admin costs to manage these pots.

As part of the Pension Schemes Bill, the government has announced plans to bring each individual’s small pots together into one pension scheme certified as delivering good value to savers. Individuals will retain the right to opt out of this consolidation.

Minister for Pensions Torsten Bell said: “We will automatically bring together people’s small pots into one high-performing pension, reducing costs as well as hassle for savers. In time, this could boost the pension of an average earner by around £1,000 as part of our Plan for Change to put more money in people’s pockets.”

Positive industry reaction

There has been a positive response to the announcement from several industry figures:

Rachel Vahey, AJ Bell: “People start a pension when they join an employer, but when they switch employer they often leave their old pension behind, neglected and unloved. This has created a plethora of small pension pots that are easily forgotten. Confirmation that government will press ahead with proposals to automatically combine the very smallest lost workplace pension pots worth £1,000 or less will help to address the issue. Although there is much more still to be done.”

David Brooks, Broadstone: “Consolidating small pots will make it simpler for savers to manage their pensions, especially in tandem with the pensions dashboard due to come on stream later this decade.”

Pete Glancy, Scottish Widows: “The proposal to consolidate small pots will help reduce industry operating costs and could lead to lower charges in the future for retirement savers. Reducing the number of smaller pots could also help boost engagement levels, with savers less likely to feel overwhelmed by the number of pots they have from previous employers.”

Zoe Alexander, Pensions and Lifetime Savings Association: “The accumulation of small pots creates unnecessary cost and complexity for savers and schemes alike. The PLSA has worked extensively with industry and the DWP to propose solutions and supports the model being proposed by the government.”

Rocio Concha, Which?: “Which? called for the consolidation of small pots under £1,000 before the election, so we are delighted that the government is committing to doing this - a move that will provide greater value for savers and support them to keep track of their pensions.”

Gail Izat, Standard Life: “The introduction of consolidators that can administer these pots effectively and invest them dynamically will be a step forward and when combined with pension dashboards will empower people to take control of their savings. We look forward to working with government on the creation of this new system.”

Sources

Government press release: £1,000 retirement savings boost from plans to bring together small pension pots. Gov.uk. Accessed 1 May 2025.

Further industry reaction: Consolidating small pension pots ‘could be a gamechanger’. Money Marketing. Accessed 1 May 2025.