The government is introducing a new pensions bill which aims to boost the amount of money people have at retirement.
First announced in the King’s Speech on 17 July, the government says the Pension Schemes Bill, which is yet to be published, could help the average earner have an extra £11,000 when they retire1. This is based on the three measures outlined below, which the government says will boost pension pots by 9% for the average worker saving over their career.
Here, we look at the key measures and what they might mean for you.
Automatically bringing pension pots together in one place
The first measure aims to prevent people from losing track of their pensions by automatically bringing their pension pots together in one place. This measure is specifically targeted at ‘deferred small pots’ – workplace pensions that are left inactive and which typically contain small amounts of money.
Around one in 11 people change jobs every year2, which means each of us could accumulate several pensions over the course of our careers. It’s no wonder that many of us lose track of our pension pots. According to the Pensions Policy Institute, unclaimed pension pots totalled £26.6 billion in 20223.
It’s already possible to bring your pensions together with providers like Vanguard. Also known as ‘pension consolidation’, combining your pots as you move from job to job can make it easier to keep track of your pensions.
You’ll have just one pension to manage and one set of paperwork. It also gives you a clearer picture of your savings. This can help you make more informed decisions around how much more you need to save and when you can afford to retire.
Pension schemes must deliver value
The proposed bill will require pension schemes to demonstrate that they deliver value to savers. This will be done via a standardised test.
Again, you don’t need to wait for the bill to be passed to ensure you’re getting value from your pension provider. Value for money is about the quality of service you’re receiving, the performance of your pension’s investments (after fees) and the level of charges you’re paying.
Transferring your pension to a low-cost provider could make a big difference to the amount of money you have at retirement. Differences in costs might seem small, but they can add up over time, especially if you’re saving for a long-term goal like retirement. Find out about transferring your pension to Vanguard.
The chart below demonstrates the impact of saving just 0.3% a year in fees over 25 years on three different-sized pension pots. It assumes an investment return of 5.5% a year. To keep things simple, we’ve assumed no further money is paid into the pots. The chart shows that if you started with a pension worth £50,000, paying 0.3% less in fees each year would save you more than £13,000 over 25 years. If you had a pension pot worth £150,000, paying 0.3% less in fees could save you almost £40,000.
Notes: This hypothetical scenario is for illustrative purposes only and doesn’t represent a particular investment or its expected returns. It assumes annual returns of 5.5%.
Source: Vanguard calculations.
Bear in mind that not all pensions may be suitable for transfer – least of all defined benefit (DB) schemes, which pay a guaranteed income. If in doubt, ask a financial adviser.
At Vanguard, we’re proud of our low charges. They were one of the reasons for being named a Which? Recommended Provider for our self-invested personal pension (SIPP) for the fifth year in a row. If you don’t know already, a SIPP is a type of personal pension that gives you more control over how your money is invested.
Our Independent Governance Committee (IGC) recently assessed whether clients who are drawing money from their Vanguard Personal Pension are getting value for money, based on investment performance, fees and quality of service. The IGC concluded that Vanguard offers value for money. Read more in our report.
Workplace pension schemes must offer retirement income solutions
Workplace pension schemes will be required to offer retirement income solutions, so that people have pension income and not just a pot of money when they retire. Many SIPP providers already offer retirement income solutions.
These include flexible income drawdown, where you can take up to 25% of your pension as tax-free cash (capped at £268,275) and leave the rest invested. You can then draw the income you need and change this amount whenever you want to. This differs to an annuity, which provides a guaranteed income. Annuities provide more certainty, but you can’t increase or decrease the income to suit your needs.
Another option is to take a series of individual lump sums, where 25% of each lump sum is tax-free and 75% is taxable. It’s also possible to use a combination of options, which adds further flexibility. Find out more about income drawdown, annuities and taking a mix and match approach.
1 King’s Speech 2024 background briefing, pages 14-16.
2 The Analysis of job changers and stayers report concluded that on average, around 9% of people changed jobs each year between 2000 and 2018, ranging from a post-recession low of around 5.7% in 2010 to a high of around 10.9% in both 2017 and 2018.
Investment risk information
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
Eligibility to invest in a Vanguard Personal Pension depends on your individual circumstances. Please be aware that pension and tax rules may change in the future and the value of investments can go down as well as up, so you might get back less than you invested. You cannot usually access your pension savings or make any withdrawals until the age of 55.
Your pension transfer will be sent to us as cash. During this period you will be out of the market (not invested) so you could miss out on any increase in the value of your pension fund should the market rise.
Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results.
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