Could small pots be auto-enrolment’s lethal legacy?

Adrian Boulding with his cherished Jaguar

50m at 2050

I spoke with Adrian Boulding last week on the issue of small pots. There are various estimates of the likely extent of the problem, the one I quote comes from DWP research which suggests that unless something is done to stop small pension pots proliferating, we are likely to see 50m abandoned pots by 2050.

Small pots are a present problem

Adrian and I discussed the future,  yesterday saw the FCA publish its latest retirement income data.  Pots fully withdrawn at first time of access in 2019/20 increased by 5% to 375,500. 9 out of 10 of these were for pot sizes less than £30,000. The total number of pots fully withdrawn in 2019/20 remained steady at around 440,000 for the year with a value withdrawn of just under £5.7 billion.

As the table below shows, the vast majority of people’s “pension” pots or plans are not being used for pension purposes at all, but are simply being cashed in.

The problem is made clear by this second chart supplied by the FCA which shows that small pots make up the vast majority of pension plans being accessed and it is only when pots get above £100,000 that cash-out becomes a rarity

Worse still , while LCP worry that the 4% rule suggests too high a level of withdrawal, the FCA’s data tells us that 42% of regular withdrawals were withdrawn at an annual rate of 8% or more of the pot value (40% in 2018/19. More than a third (36%) of plans accessed last year, were accessed with the help of regulated advice. One wonders how many of the cash withdrawals and 8%+ regular income options were as a result of advice.

We do not yet know how many of these pots being cashed in are one of several pots owned by the pot-holder , my fear is that they may not be and that what might look like a minor tax problem could balloon into a tax catastrophy down the line. The first pot is the cheapest and pots being cashed out today may not be the last.

We  need to increase public awareness of their options at the point of spending and I do not mean the public who naturally responds to calls to go to Pensions Wise, the public in question is the one the FCA’s scam awareness adverts are aimed at. Public awareness of the self-harm that can be done by not getting pension decisions right must focus on those with small pots. It is not enough for Adrian and I  to talk about ideas for the future, we need to be doing something about the present

Small pots need consolidation if today’s problems aren’t to get worse

Yesterday, I was sent a questionnaire that seems to be doing the rounds

1. Is the lifetime provider option viable? How practical is it? 

The idea of pot following member with a provider for life is – like the pension dashboard, good in principle but unrealizable. I suspect it fails on a number of grounds. Employers still like to determine who is their pension provider, technology doesn’t develop overnight to sort the payroll issue and there is the issue of getting stuck with a duff provider. Of the three, the last may be the thorniest for Government, a pot for life could stifle competition and innovation with people finding out too late , that a decision taken on their behalf when they were 22, is impacting them 40 years later – and not in a good way,

  1. If the lifetime provider option not viable, which other consolidation option do you prefer and why?

Of the many alternatives Adrian and I discussed, the idea of a small pots dustbin , where a specialist provider manages small pots at an exaggerated AMC well in excess of the charge cap, is the least good option. I mention it as this is the Australian solution and while it allows viable master trust (operating on a mono-charge) to rid themselves of a cross-subsidy, it should not be at the expense of members with small pots.

My favoured solution is for the large schemes to allow their data to be examined by interrogative software to identify dormant pots which have the same owner elsewhere. Provided there is no detriment in transfer, bulk transfers should be permitted between schemes without member consent, meaning that pots are auto-aggregated. Since we know that 80% of relevant data is held by 12 providers (source Pension Bee), collaboration of this type between providers is the obvious immediate solution

  1. Is the problem urgent or do you think the government will kick any findings from the new DWP Working Group on the subject into the long grass?

The Problem is urgent, especially for  members with multiple (rather than a mono ) charges.

Many members with small pots are today having their savings eroded by high charges. A member with a £500 pot and say £1.50 per month charge would see c3.6% erosion before fund management charges (amc).

  1. Do you have any other comments?

There is the consideration of the regulatory costs of small pots. I am grateful to Steve Goddard who, until recently, ran the Salvus mastertrust , for these thoughts.

DWP need to consider waiving TPR levy  for pots smaller than say £1,000 to allow providers such as Master Trusts to act as consolidators. The obvious answer  larger Master Trusts who could “release” monies under the arrangements outline above, making them more profitable.

TPR might also need to approve lower financial reserving for small pots as part of the authorisation regime.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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