Taxbriefs Commentary Library

Proposals to deal with small pension pots

Ian Naismith, 06 Jun 2013


The Government has announced plans to legislate for small pension pots, of up to £10,000, to be transferred automatically to a new employer’s pension scheme. Scheme members will be able to opt-out.

There’s little definitive evidence, but the current consensus is that on average people move jobs seven times in the course of their lifetime. With auto-enrolment that could that lead to an average of seven pension pots. The Government’s proposals are a response to this unappealing prospect.

Automatic transfers will only be made between money purchase pension schemes, including personal pensions, and will not take place where the existing pension includes guarantees. They will also not apply initially to pension arrangements started before a date in the future that has still to be announced.

The transfer process may be facilitated by the use of a central database. When a member leaves employment with a small pot or after no contributions have been paid for a specified period, the scheme will register the benefits on the database. The new scheme will then be able to interrogate the database and initiate the transfer. Alternatively, individuals moving jobs could be given a pension statement that is similar to a P45 to pass onto a new employer. The new pension scheme will then use the statement to initiate the transfer. Which of the two methods will turn out to be implemented will largely depend on the success of the pensions industry in agreeing proposals for the central database.

The proposal has caused some controversy among those who would have preferred either a special scheme or schemes to be set up specifically to receive transfers of small pots, or for national employment savings trust (NEST) to fulfil that role. They suggest that individuals could lose out if the new scheme has higher charges than the old one. This has led to the Government proposing minimum standards for receiving schemes, although it is not clear whether this will include a charge cap.

The Government has also announced that from 2014 it will scrap short service refunds under which occupational scheme members can receive their contributions back if they leave within two years.

This article appeared in the May edition of Financial Timesaver - the monthly digital newsletter for the busy financial adviser. Click here to subscribe today.


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Ian Naismith

Actuary & Author

Ian Naismith is an actuary with over 30 years' experience of working in pensions for a major life office.  He writes and presents extensively, including an annual report on pension provision in the UK based on a large  consumer survey.  He is a Governor of the Pensions Policy Institute.    

Ian is also co-author of Pensions and Retirement Planning 2012/13, part of Taxbriefs Adviser Guides Series.


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