The Great Pensions Black Hole – & why YOUR cash may end up there

So how do you lose £2000 without knowing it? 🤯 

That’s the average value of ‘lost’ Child Trust Funds worth a total £1.5bn, which parents don’t know they have, or have lost track of, since the government created CTFs in 2005.

But ‘lost’ pensions could soon make £1.5bn look like peanuts, as Iona explains…

Like CTFs, which a child cannot access till they are 18, a pension has a long time to be forgotten about. Unlike CTFs – essentially a one-off government bung – pensions swallow up our own cash along the way. And like anything to do with investment and pensions, it’s so easy to be paying out more than you think for less than you expect.

There are already £3bn worth of unclaimed workplace pensions – that’s £3bn of savers’ money doing them no good at all!

Enrolling us all automatically into a pension at work means that in 30 years time there will be over 50 million abandoned pension pots. Two-thirds of them will be worth up to 10K and a third will clock in at over 10K, according to the Department for Work and Pensions.

So what are the government doing about this?  Er…

via GIPHY

The average time spent at one employer is now 4.6 years. That amounts to 10 different jobs in a typical working lifetime. A quarter of us will have 14 or more jobs.

So, a millennial is likely to be collecting 10 or more pension pots over the years.  And we’ll all know exactly where they are, how much they are worth, and whether it is worth moving them to a better plan, right?

No, because the government – in its infinite wisdom – does not seem to think that is important.

Wait, surely the government is doing *summat* about this problem? 

Well, these are the steps it has taken so far.

✅ In 2013, it announced that when people change jobs, their pension pot will go with them. This was known as ‘pot follows member’. (Yay, a possible solution on the horizon.)

❌ In 2015, the rot set in when the government scrapped the right for people to get their contributions back for pots under £2000. (Ooh, that’s no so great, because even if these are very small pots that won’t make much of a dent in your retirement income, every penny counts.)

❌ More bad news followed in 2015, when the government changed its mind and abandoned pot follows member.

🤔 Last year, the government promised a new ‘pensions dashboard’, enabling anyone to keep track of all their pensions online. (Not ideal, but better than nothing).

😡 This week, it changed its mind, chickened out and  withdrew its support for the dashboard. It gave the industry the green light to come up with its own dashboard – how good of them! – but of course, this will be a total lame duck because the government won’t provide details of your state pension or force companies to co-operate with the scheme.

Hargreaves Lansdown, the UK’s biggest pensions and investing platform, has an alternative plan.  It says:

The number of dormant pension pots is increasing with all the speed of a runaway train. Giving people the opportunity to pay into their choice of pension when they join a new employer would help put the brakes on before the problem threatens to de-rail the auto-enrolment project.

Ireland is about to launch auto-enrolment and is consulting on a ‘pot follows member’ system, to be built in at the outset.

The UK pensions minister, currently Guy Opperman, says everyone already has a “statutory right to transfer to another pension scheme of their choice” and can use the government’s ‘pension tracing service’ to find lost pots. Soz Guy, that just doesn’t wash.

The industry resisted pot follows member on grounds that a pot could be transferred from a good well-run plan to a bad expensive one, and because their systems weren’t really up to it.

Fair point, but according to industry guru Henry Tapper:

One of the oddities of pension policy is that we have – very slowly, built up the tools to allow pots to follow member. We can quite easily run dashboards and we could populate those dashboards with real-time data which could allow people to take decisions about which pots to fold into what pots!

And if it really is too problematic, why not legislate to create a proper pensions dashboard, and back Hargreaves’ proposal to allow everyone control over their pot?

That could be backed up with an improved financial advice ‘allowance’ enabling people with multiple pots to make an informed decision to transfer them to the best company.

One suggestion is that as the current £500 advice subsidy is not enough, allow a further sum of £1000 to be ‘borrowed’ from the pension pots.

Meanwhile, latest government figures show the average contribution into a private sector pension fell again last year, from 4.1% to 3.4% of earnings – a pathetic shadow of the 15% to 20% really needed and taken for granted in public sector pensions.

So before we get carried away with the savings revolution, lets learn from the past and try to ensure that those savings do not end up in the Great Pensions Black Hole. We could end up with numbers that even Brian Cox would struggle to compute…

What do you think? Leave a comment or tweet me – @ionayoungmoney.

2018-09-10T17:48:19+00:00 September 7th, 2018|

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