Are you one of the 20 million people with a lost pension?

There has been a boom in the number of small pension pots in the UK, the Institute for Fiscal Studies (IFS) has found. There were around 20 million defined contribution pension pots valued under £10,000 in 2023 which are no longer being topped up and are worth a total of almost £30 billion, according to an IFS report.

The think tank claims over half of these pots, or 12.1 million, were worth less than £1,000, with a combination of people switching jobs and automatic enrolment into workplace pensions is behind the increasing number of lost pensions.

Automatic enrolment is one of the big public policy success stories of our time. Since 2012, over 11 million people have been automatically enrolled into pensions, creating many new pension savers. But it’s not without its flaws. People switch employer, and then switch pension, leaving their old one behind, neglected and unloved. This has created a plethora of small pension pots which are easily forgotten.

What’s more, these pots are no longer being contributed to, meaning it’s possible the owners have forgotten about them. This lays bare the problem facing millions of people who could be in danger of missing out on thousands of pounds of disconnected pension money that could boost their long-term wealth.

The government has several initiatives already in play that could help turn this situation around. But these all appear to be separate endeavours, with no common thread binding them together or consideration of how one plan affects the others.

Pensions dashboards also have a big role to play, allowing savers to see all their pensions in one place online, reuniting them with lost pension wealth. But the government first needs to set in stone a date for the launch of commercial dashboards, offering a clear path forward for firms to deliver dashboards and allowing millions to view all their pensions in one place simply, easily and quickly.

Should you consider combining your pensions?

There are plenty of reasons why combining your pensions with a single provider can be a good idea. Most obviously, a single retirement pot is much easier to track and manage than having various pensions with different providers.

You could also benefit from lower costs and charges, increased income flexibility and more investment choice by switching provider.

Older pension schemes, for example, often charge more than modern pensions, while plenty of workplace schemes don’t offer a full range of retirement income options or restrict your investments to the firm’s own in-house funds.

While a charge cap of 0.75% applies to the default investment option in auto-enrolment workplace pensions today, many pension policies, including older contracts or those setup outside auto-enrolment, may carry higher fees.

The impact of reducing your pension charges can be significant, particularly over the long term. Someone combining three pensions with charges of 1.5 to 0.75% could boost their pension pot by over £7,000 over 10 years or £20,000 over 20 years if they were to switch to a single, lower cost account (see table below).

Source: AJ Bell. Assumes three separate pensions of £25,000 charging 1.5%, 1% and 0.75% are combined into a single account charging 0.45%. Assumes annual investment growth of 5% before charges.

How to combine your pensions

You could decide to consolidate with a single provider, such as in an AJ Bell Self-invested personal pension (SIPP) or Ready-made pension. Assuming the pensions you’re combining are ‘defined contribution’ pensions – where you build up a pot of money which you can access from age 55 – the process should be relatively simple. Note that the minimum age you can access your pension is set to rise to 57 in 2028.

If you have a ‘defined benefit’ pension valued at £30,000 or more, you will need to take regulated financial advice before transferring. Where defined contribution savers build up a pot of money, defined benefit schemes provide an income for life from a set date, usually based on your salary and the number of years you have been a member of the scheme. Lots of providers will only accept a transfer from your defined benefit scheme where the adviser has recommended you do this.

You’ll just need to choose a provider to consolidate your pensions with and get the details of the pension or pensions you want to transfer over. Once you’ve given the relevant details to your new provider, they should do all the legwork for you. Lots of providers will help you to hunt down lost pensions, such as the AJ Bell pension finder. You just enter a few details and the pension assistant will search for your pensions, keeping you updated along the way.

Before transferring any old pensions, you should check there aren’t any valuable benefits attached which you may lose or exit charges that will be applied. Your provider should be able to tell you if this is the case.

You will then need to choose where to invest your pension. When doing this, make sure you are comfortable with the risks you are taking, have a diversified selection of investments and, crucially, keep your costs as low as possible.

Many firms offer a choice of diversified funds designed to meet different risk appetites if you aren’t confident choosing your own investments.

The Pension Tracing Service is a useful tool to locate missing pensions, and some providers also may be able help. At AJ Bell, for example, we have a ‘Ready-made pension’ service, which allows people to find pensions and combine them into a Ready-made pension account with a single annual fee as low as 0.45%.