The UK has over £31bn in lost pensions: can combining pots help?

There is over £31 billion* in unclaimed pension pots floating around the UK, a number exacerbated by frequent career changes and workers being automatically placed in a pension scheme.

The automatic enrolment workplace pension scheme has been touted as one of the most successful projects by government in recent years. In 2012, when auto enrolment was introduced, there was £87.1bn saved into workplace pensions. Ten years later, this figure stood at £114.6bn. In addition, the proportion of women saving into workplace pensions doubled, as did the number of people aged 22-29 saving into a workplace pension.

But employees potentially having a more hands-off role in their pensions also means it can slip into the background when moving to a new company, leading to more pensions lying dormant.

The amount in unclaimed pensions has increased rapidly, up 60% since 2018, according to the Pensions and Lifetime Savings Association. There are about 3.3 million unclaimed pots across the UK, with an average value of £9,470.

As impressive as the improvement in pension amounts has been, without keeping track of those pensions, there’s little benefit for the gains.

Does combining pensions matter?

By keeping those pensions in a single pot, investors can have a much simpler journey to tracking and managing their retirement fund. This can also allow you to search for lower costs and charges or expand the range of investments you can access.

While there is now a 0.75% charge cap on default workplace pension investments, older pensions were not subject to these rules, so they may be charging you a higher rate that damages your returns in the long run. By combining these older pots and choosing a lower fee, you can reap greater rewards.

For example, if someone had three pension pots each with £25,000 from previous jobs, with investment fees ranging between 1.5% and 0.75%, they could make the decision to put these investments under a single umbrella with a lower fee, such as 0.45%. Over 10 years, if the pots grew annually by 5% before charges, they could accumulate over £7,000 more by combining. In 20 years, this could be in the region of £20,000.

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 do I combine my pension?

The first step in combining pensions is taking a roll call. Any full-time job held since 2012 that you worked for more than three months would have enrolled you in a workplace pension, as long as you were 22 or older. So, it’s a good idea to have a look at your resume, and make sure you can account for a pot linked to each job.

If you are missing some of your pension pots, you can use the government’s Pension Tracing Service to find lost investments, or you can use tools like the AJ Bell Pension Finder, which allows you to find pensions and combine them into a Ready-made pension account or a SIPP.

Next, you need to check what type of pensions you hold. Most pensions today are defined contribution pensions, which means that you are building up a pot of money that you can access when you turn 55 (or 57, beginning in 2028). These are typically easy to combine and transfer.

Some pensions, are defined benefit, meaning the company would pay you an income for the rest of your life, beginning on a set date. Many pension providers will only allow you to opt to transfer this sort of scheme with the recommendation of a qualified independent financial adviser.

If you are combining defined contribution pensions, your SIPP provider will do most of the work for you. Simply choose with whom you would like to have your pension and provide them with details of all your previous pensions. Make sure you check if there are any benefits tied to existing pensions that would be lost if you transferred to a different platform and check for any exit fees.

It can take some time for the pension transfer to occur, but in the meantime, you can plan for how you intend to invest. If retirement is far in the distance, you may be comfortable taking a higher degree of risk because you have time to ride out any market dips. But if you are nearing the end of your career, you may want to choose a more conservative strategy which is less influenced by market volatility.

It’s worth noting the government is currently working on the Pensions Dashboards Programme, which will allow you to see all your pensions, including your state pension, in one place for free. This service may not be available for another few years.

*Source: Pensions Policy Institute