Pensions are a critical component of retirement planning, providing financial support to individuals during their post-work years. The Chancellor has recently revealed plans for pension funds in the Autumn Statement, with his proposal for a pension “pot for life”.
The current situation and how it would change
Currently, under the highly successful workplace auto-enrolment scheme, it is the employer who selects the pension scheme provider for their employees. This is often with the help of an adviser. The proposed new scheme would give employees the legal right, when changing jobs, to pay their own pension contributions into an existing pension scheme rather than into their new employer’s pension scheme. This pot for life, or lifetime pension, would remain the same no matter how many times a person changes jobs.
At present there is an astounding £27 billion in lost and unclaimed UK pension pots. The new scheme aims to prevent this excessive amount of “lost” money by ceasing the eventuality of multiple smaller pension pots from different employers. This means employees would not need to worry about changing jobs leading to a loss of pension at retirement.
Advantages of a Lifetime Pension
Introducing this scheme would give employees the ability to select their own pension provider. Their employer, as well as any future employers, would be required to pay contributions into this chosen plan. Individuals with a more hands-on approach to their workplace pension would benefit from this. Whilst many employers would take advice from experts when setting up pension plans for their employees, not all will. In these instances, it will be advantageous for the employees to select their own plans.
With having one pension pot, there is far less chance of losing track of the funds you’ve accumulated over your working life. This could make a life-changing difference to you when it comes to retiring. The more pension pots you have, the greater the risk that one will become “lost”. You may forget to update them with new addresses, for example. When you come to draw down your pension, you’ll not necessarily have the details of each pension pot. This could mean you’ll be losing out on funds.
As you approach retirement, you may be looking to start making plans. With multiple smaller pension pots it can be more difficult to ascertain exactly what your financial situation will be after retirement. By having a single pension pot for life, it’ll give a greater insight into future available funds and allow for better retirement planning.
Disadvantages of a Lifetime Pension
A singular pension pot for life, however, isn’t without its drawbacks. For employers with great pension schemes, this may not hold as much sway when it comes to attracting and retaining employees. Once a pension provider has been chosen by an individual, with the choice the lifetime pot gives, there could be less flexibility in changing pensions. By the very nature of the UK economy, interest rates and level of inflation over recent years, this could put employees at a disadvantage. What was once a superior pension plan may not be if/when the economic climate changes.
The power a single pension pot for life gives to the individual is great for those with some financial knowledge. However, this is not the case for many. Individuals will need to ensure they are educated in understanding what makes a good investment in terms of pensions. Safeguards will therefore need to be put in place to ensure this. At present, the responsibility is that of the employer, but the onus would be put on the employee in the case of the lifetime pension.
Under the pot for life system, pension providers will inevitably seek to cherry-pick the higher earners. This will leave lower earners behind, and may lead to these employees not receiving the help and guidance they need.
Arguably the greatest drawback of the proposed scheme is the administration time and cost it will take to adopt. A total overhaul of the current system would be required, with both employer and employees having new responsibilities.
Final thoughts
As you can see, there are many benefits to the “pot for life” pension proposal. However, there are several drawbacks to it too. It could revolutionise pensions in ways we haven’t yet imagined. But it will change the dynamic between employers and employees and the consequences of this are very unclear. Planning for retirement has never been more important. So employers and employees both need to ensure that they are well-equipped to deal with the current system and the proposed changes. Employers need to know how to provide most appropriately for their workers. Employees need to be equipped to take control of their own pension pot(s) if necessary. Going forward, efforts must be made to ensure that employees engage with their pension, and are better informed to plan for their retirement. Improved access to pension information is vital to aid this.
All things considered, the proposal of a lifetime pension could well be a brilliant idea. However many considerations need to be made around its implementation and rollout. We’ll update you as and when further information about the proposal comes to light.
