Pot for life pensions: Pros and cons of Jeremy Hunt’s new policy idea

Category: News&Pensions

Looking after your pension in times of political and economic uncertainty may feel confusing and overwhelming. Furthermore, if you’ve changed jobs multiple times throughout your career there’s a good chance you have more than one pension pot to keep track of, which could make managing them even more complicated. 

So, having a single pension “pot for life” to save into throughout the remainder of your working life, as proposed by chancellor Jeremy Hunt in the November 2023 Autumn Statement, might sound like an attractive idea. 

However, this could represent the biggest shake-up of workplace pensions since automatic enrolment was introduced in 2012. And while some have welcomed the idea, others question how it would work in practice.

Read on to learn more about this new policy idea and explore the potential pros and cons for your retirement savings.

A pot for life would allow savers to have just one pension of their choosing

According to the government’s Autumn Statement, a pot for life would give workers the “legal right to require a new employer to pay pension contributions into their existing pension, if they choose”.

The proposal has only just entered the consultation process so it’s unclear how and when this measure could be implemented.

However, the main purpose of a pot for life pension is to give you more control over your retirement savings and enable you to save into a single pension. 

This could help to reduce the problem of lost pensions, which often result from people generating lots of small pension pots when they switch between employers multiple times throughout their working lives. Research published in PensionsAge has revealed that two-thirds of workers have more than one pension pot and 16% of workers aged 40 or over have four or more pension pots. 

A pot for life would allow you to choose your pension provider instead of automatically being enrolled into your employer’s default arrangement each time you start a new job. 

The potential pros of a pot for life

Swapping multiple small pensions for one single pension pot may sound appealing. Indeed, there are several potential benefits to the idea.

Increased autonomy

Under the current automatic enrolment rules, employers select the pension scheme provider for their employees, which may contribute to a lack of engagement.

Research published by Aviva has highlighted the rise of the “triple defaulter” who sets and forgets their pension – never reviewing or updating their contributions, investment choices, or target retirement age.

In contrast, the pot for life could give you as an employee the power to choose a scheme that reflects your individual needs. This greater autonomy might encourage you to be more proactive about aligning your savings strategy with your retirement plans. 

Potentially saves time and money 

Accumulating lots of small pension pots can be time-consuming and inconvenient to manage. You may also be more likely to “lose” a pension.

Furthermore, if your pensions with previous employers remain dormant for a long time, their value could be gradually eroded by various administrative charges and fees from your old pension provider.

As a result, having a single pension pot could potentially save you time and money.

Easier to track progress 

According to figures published by Standard Life, 75% of UK adults don’t know how much is in their pension pot. Without understanding your current funds, assessing whether you’re on track to achieve the retirement lifestyle you want may be challenging.

By engaging with your finances, you could set realistic long-term goals and make changes to improve your situation such as increasing your pension contributions. 

Monitoring a single pension instead of lots of smaller pots could make it easier for you to know how much money you have built up and reduce the risk of losing track of older pensions. 

Improved financial literacy 

You may be more motivated to understand your pension provision and take action if you have more control over your funds.

By educating yourself about pensions and improving your understanding of financial planning for retirement, you could be better placed to align your long-term goals with your current savings strategy.

Read more: How consolidating your pensions can be a valuable step towards your retirement goals 

The potential cons of a pot for life

Despite the appeal of having a single pension pot for life, there are some potential cons to consider.

There may be a greater risk of making mistakes 

If you’re left to make your own pension choices without fully understanding how different schemes and investments work, there may be a greater risk of a mismatch between your savings strategy and the long-term goals you have for your retirement.

Research published in IFA Magazine shows that a third of people in the UK feel they have made poor financial decisions in the past two years.

Working with a financial planner could help you understand your current pension provision, assess whether you’re on track to save enough for the retirement you want and, where necessary, make appropriate changes.

Potential for confusion and stress  

If you’re used to an employer researching and choosing a pension scheme for you, taking ownership of this decision could feel daunting. 

Financial literacy, financial wellbeing and emotional wellbeing are often interlinked. So, navigating the pensions market for the first time with a limited understanding of how it works may lead to confusion and stress.

Administrative complexities

It is currently unclear how the pot for life proposal might be implemented in practice.

It would represent a big change for the pension sector, employers and workers and this could potentially lead to administrative teething problems.

It may also be a long time before this proposal comes into force and with a general election due before 28 January 2025, the future of the pot for life idea is uncertain.

How to create a pot for life using a SIPP

However, many of the advantages of a pot for life are already available if you combine an old workplace pension with a private pension or a self-invested personal pension (SIPP). A financial planner can help you explore this option and decide whether it’s right for you. 

Get in touch

If you’d like to learn more about how to build your own pot for life with a SIPP, please contact us by email at info@lloydosullivan.co.uk or call 020 8941 9779 to see how we can help you.

Please note

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results. 

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.