I’ve had to do some thinking over the past few days about small pots, partly because I shot my mouth off at a meeting with the DWP and got called for some bullish comments about consolidation by the Pensions Minister.
The upshot of this thinking has been a few conversations with people who think practically about what pension saving is for. The general consensus is that a pension pot is not a pension till its owner considers it’s worth bothering to use it to pay an income. Cashing out a pot under £10,000 can be considered a windfall, cashing out a pot of £30,000 requires a bit of tax-planning and perhaps a more strategic plan that sees the money last a few years. By the time people have a pension pot of £100,000, the money is serious and people start taking decisions about whether they want it to pay them a wage for life. These are the lessons I can draw from the recent publication by the FCA of its retirement income market data.
The consolidation of small pots into one big pot is likely to improve the management of the retirement income because small pots are treated as windfalls and big pots buy pensions.
So we would do well to start working out , at some stage prior to our relying on our savings to live on, what of all the pension savings pots we build up – should be our master pot.
Master pot = “default decumulator”.
I am not going to refer to “default decumulators in this article though that is what the pensions industry currently refers to when discussing the master pot. It’s a woeful epithet and should be banned!
My idea is that everyone should have a master pot which gets all the bits and bobs of pension saving tipped into it. But for most people, the choice of which of the various pots they build up to use as their master pot is an impossible choice.
What the Government can and should do
For this reason, we need a Government intervention, which is happening. The Government has set up a working group to look at how to reduce the proliferation of small pension pots and help people to manage retirement decisions better.
The Government intervention need not be heavy handed, it can still allow people to choose their master pot – though most would rather it were chosen for them. People should have the choice of not having money consolidated to their master pot , but if they take no choice, they should accept that small pots will be combined into their master pot .
The Government’s role should be decisive but resticted
- It should encourage DC schemes that want an inflow of small pots to apply to be consolidators and for consolidators to be authorised by the Pensions Regulator – alongside master trusts and super trusts
- It should mandate that on a certain date in the future, the consolidator schemes declare their active members to the DWP’s national insurance service and a link is established between each person’s national insurance number and a consolidator – who by default now manages the master pot. It should promote the concept of the master pot to all pension savers encouraging people who have conviction to switch to their chosen consolidator.
- Once the master pot has been established, small pots should combine into the master pot automatically within a certain number of days after regular contributions cease.
Government should not be able to restrict people from transferring their money into pension arrangements not on the Pension Regulator’s list, but – as was the case with stakeholder pensions – the regulator could show which schemes met consolidator standards. People choosing to ski off-piste would be advised of the risks of doing so.
What people should be able to do
People should be free to decide on their own consolidator (subject to joining restrictions) and is should be easy to message the register and flick providers.
People should be free to move legacy pots below a certain monetary amount to consolidators , with a swipe of the finger. Below a certain amount, current safeguarding restrictions should be relaxed. There has to be proportionality about safeguarding and we should also recognise that the risk of small pots being scammed is very small. We should not let the general good be obstructed by fantasy risk.
As a general rule we should accept that people are still responsible for their legacy pensions and should be responsible when consolidating, but we need to free up the consolidation process so – at least for small pots- transfers can be made without the current regulatory hoop-lah!
What providers need to do
It is in the interests of everyone – including employers – to make the system work. But employers are already burdened with the bulk of the compliance responsibilities and it is not right that they are required to administer a solution to the small pot problem.
So I suggest it is incumbent on providers, once (say) three months contributions have been missed to write to savers with small balances, informing them of their options “do nothing and your money will go to your master pot”, or intervene and elect to keep the pot where it is or be transferred at your direction.
A similar communication can be sent to savers with larger balances, encouraging them to consider transferring to a master pot. This kind of nudge needs to be accompanied by a simple way of taking things forward. We really need to take the mystery out of pension pots and adopt a common sense attitude to consolidation.
What should be the small pot limit?
My personal view is that it should be £4,000 – which is in line with the small pot limit in Australia. There will be those who think it should be higher or lower and this is the kind of thing that consultations sort out.
There are many other wrinkles that would need to be attended to
- What about people who aren’t in a consolidator scheme at outset and don’t join a consolidator scheme in years to come – should there be a master pot of last resort?
- Can safeguarded benefits be automatically red-flagged by legacy providers to reduce the risk of self-harm when transferring legacy?
- Can the pensions dashboard be used for “swipe of the finger” consolidation?
But overall , this approach looks pretty much oven-ready.
- There is precedent for the national insurance system keeping records of people’s pots (it worked for contracting out)
- There is technology in place for money to be swept on mass from scheme to scheme (Origo and Star)
- People are more adept at managing the switching of accounts (think utilities and even banking)
- We are promised a pensions dashboard which can show people their small pots and what to do with them.
- The system does not depend on financial advice being given
- The idea of a Master Pot is positive and easy for people to understand.