Your pension could be automatically moved when you switch job
Steve Webb, the pensions minister, wants more people to have 'one big pot' when they retire rather than lots of small pension pots.
Switching job can be stressful and time-consuming, so what happens to your pension may be the last thing on your mind. But if you don’t think about your pension at that point, you may lose out.
This is especially true if you’ve had a defined contribution pension where both you and your employer have paid into a pension pot while you worked. That pension pot could then be converted into an income when you retire.
Leaving your pot behind
Lots of people just leave their pot with their previous employer when they switch job. That decision could hurt you in four ways:
- You might completely forget about the pot and never cash it in!
- If you’ve got more than one pot, you’re less likely to engage with your pension and ensure you’re getting the best possible deal.
- Waiting to transfer until later may mean that you end up paying higher exit charges.
- When you retire and convert your pension pots into an income, you may get a lower income if you do this pot-by-pot. Normally a larger pot will convert into a higher income in percentage terms. So a £100,000 pension pot might, say, give you an annual income of £5,000 (5% of the pot) while a £10,000 pot might only give you an annual income of £480 (4.8% of the pot.)
The Government is worried about these issues and is now planning to introduce automatic pension transfers when people switch job. So if your pension pot with your current employer is worth less than £10,000 when you leave, it will automatically be moved to your next employer. You will, however, be able to stop the transfer if you wish.
Making the transfer means there’s no danger of you forgetting about your pot, and you’ll be more likely to carry on taking an interest in your pension.
After all, if your pension pot with your current employer is £5,000, you may say to yourself: "That’s not much money. It’ll never make any difference to my retirement, so I’m not going to waste any time thinking about it."
But if, say, you’re 40 years old and you have one big pension pot worth £25,000, you may get a little bit excited by the whole process of saving for your retirement. Then you’ll be more likely to make extra contributions and ensure that your pension pot is invested in the right place.
It’s estimated that currently a quarter of the working population have five or more ‘dormant’ pension pots. The Government’s proposal could reduce that figure to one in 50 by 2050.
Be careful
Overall I think the Government’s plan is sensible. But you do still need to be careful when you switch jobs.
It’s essential that you check that your new employer is offering a pension scheme where the charges are low. It’s possible that your current employer offers a cheap pension scheme – perhaps operated by Now Pensions or Nest – and your new employer offers a scheme that is more expensive. If that’s the case, it might make sense to leave your previous pension where it is.
Whatever you do, don’t forget about any of your pensions!
More on pensions and annuities:
The company pension propped up with 20,000 tonnes of cheese
How to make sure you can pay into your workplace pension
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