On 24th April 2025, the UK Government announced significant plans aimed at simplifying pension savings by automatically consolidating small, inactive pension pots. Many people accumulate several small pension pots from different jobs over their careers, which can end up being eroded by high fees or lost altogether. The Government’s new proposals seek to reduce the cost and hassle for savers and, in time, boost the pension pot of an average earner by around £1,000.
This article explains the proposed changes, the drivers behind them and what they could mean for your retirement savings. I also highlight free services that already exist that can help consolidate small pension pots for you.
Why small pension pots are an issue
Auto-enrolment, introduced in 2012, has successfully brought millions more people into pension saving. However, a side effect of its success, combined with today's more frequent job changes, is a rapid increase in the number of small pension pots left behind when people move jobs. These are referred to as 'deferred' pots because they are no longer receiving contributions.
According to the Department for Work and Pension (DWP) there are currently around 13 million deferred pension pots holding £1,000 or less, and this number grows by about a million each year.
This increasing number of small pension pots causes several problems:
- Small pension pot erosion: Flat administration fees charged by pension providers can significantly reduce the size of small pots over time, especially when multiple pots incur separate charges.
- Administrative costs: Managing these numerous small accounts is inefficient and costly for the pension industry, estimated at around £225 million annually. These costs can ultimately impact the value delivered to all savers through higher charges.
- Lost pension pots: With small pension pots scattered across multiple providers, it becomes easier for individuals to lose track of their pensions entirely. According to Pension and Lifetime Savings Association research (published in October 2024) there is £31.1 billion in unclaimed, inactive or lost pension pots.
How the new automatic consolidation scheme could work
To tackle the above challenges, the Government plans to implement a system (which previously had a working title of the 'Multiple Default Consolidator Model’).
Here’s how the new scheme could work:
- Automatic transfers of small pension pots: The system will automatically identify pension pots valued at £1,000. These eligible pots will then be transferred and consolidated.
- Consolidation will be carried out only by authorised providers: The money from these small pots will be transferred into one of a small number of authorised pension schemes, managed by established providers that adhere to strict rules set out by the UK financial regulator (the Financial Conduct Authority) and The Pensions Regulator.
- Savers will be able to opt-out: While the consolidation process is designed to be automatic for efficiency, individuals will have the right to opt-out if they prefer to keep their small pots separate. The exact details of how savers will be notified and how they can opt-out are being developed.
What this means for savers
The potential benefits of the plan for automatic pension consolidation are:
- Simplified pension management: Having fewer, larger pension pots should make it significantly easier for individuals to keep track of their retirement savings and plan effectively.
- Reduced fee impact: Consolidation helps protect savings from being eroded by multiple sets of flat administration fees.
- Potential boost to savings: By saving on fees and potentially benefiting from better investment returns in larger better value schemes, the Government estimates this could increase an average worker's pension pot by around £1,000 over their working life.
The potential drawbacks include:
- Small pension pots will still be lost: The arbitrary £1,000 limit on the size of pension pots that will be automatically consolidated means that small pension pots above this level will still be left languishing.
- Investment strategy considerations: Consolidating pension funds automatically will inevitably mean a change in the specific investment funds money is held in. How will this be handled and will money just end up in ‘default’ funds which are not suitable for all savers?
- Awareness still remains a hurdle: Consumers will still need to pay attention to communications from pension providers about potential pot transfers and the opt-out process. There remains the question of how will consumers be reunited with lost pots even once they are consolidated?
- Scheme Scope: At present the scheme is to target defined contribution pensions and not defined benefit (final salary) schemes. It is not yet clear whether it will cover Self Invested Personal Pensions (SIPPs).
When will automatic small pension pot consolidation start?
Before we see automatic pension consolidation it requires new legislation and significant technical development.
- Legislation: The necessary legal powers will be part of the Government's Pension Schemes Bill. The Government aims to put the Bill before Parliament by the Summer Recess (July) of 2025.
- Implementation: After the Bill becomes law, a central data platform will likely need to be built and integrated with pension providers' systems. Therefore, the automatic consolidation process is unlikely to be fully operational before late 2026 at the earliest, and potentially later.
Is this different from a 'Pot for Life'?
Yes it is. It's important to distinguish this small pot consolidation plan from the 'pot for life' concept proposed by the previous Conservative Government.
- Small Pot Consolidation focuses on tidying up the millions of existing small, deferred pots
- 'Pot for Life' was a separate, longer-term idea the previous Government was exploring. Its aim was to prevent new small pots from being created by potentially allowing individuals to choose one pension scheme that all future employers would pay into. The current Government has not announced any plans to pursue the ‘Pot for Life’ concept.
How to consolidate your small pension pots now?
The good news is that you don’t have to wait for automatic pension consolidation to become a reality (if it indeed ever does) as there are a host of services that already exist that can help you find and consolidate small defined contribution pension pots. We cover these in detail in our article “What is pension consolidation – and how do I do it?”
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