The Small Pots Problem
Auto-enrolment has been hugely successful in getting millions more people saving into a workplace pension. But there is an unintended side effect: every time someone changes jobs, they leave behind a small pension pot with their former employer's scheme. The average UK worker now changes jobs 11 times during their career, creating a trail of orphaned pots.
The Department for Work and Pensions estimates there are approximately 12 million deferred pension pots worth under £1,000, with the number growing by 900,000 each year. Many of these pots are slowly eroded by ongoing charges until they are worth very little or nothing at all.
| Pot Size | Estimated Number | Annual Charge Impact (0.5%) |
|---|---|---|
| Under £100 | 3.3 million | Less than 50p — but charges may exceed growth |
| £100–£500 | 4.8 million | £0.50–£2.50 per year |
| £500–£1,000 | 3.9 million | £2.50–£5 per year |
How Auto-Consolidation Will Work
The government's proposed framework involves a multi-step process:
- Identification — when you leave an employer, your deferred pot is flagged as eligible for consolidation if it falls below the threshold (expected to be £1,000 initially)
- Matching — a central clearing house connects your old pot with your current active workplace pension
- Notification — you receive notice that your pot will be transferred automatically
- Opt-out window — you have a set period to opt out if you want to keep the pot where it is
- Transfer — if you do not opt out, the pot is automatically transferred to your current scheme
The Role of the Pensions Dashboard
The Pensions Dashboard is closely linked to auto-consolidation. By giving people a single view of all their pensions, the dashboard will make it easier to identify scattered pots and choose whether to consolidate them. The dashboard's data infrastructure will also support the matching process needed for automatic consolidation.
Benefits of Consolidation
- Lower charges — a single larger pot may qualify for lower percentage charges than multiple tiny pots
- Simpler administration — one pot to track instead of many
- Better engagement — people are more likely to actively manage a meaningful sum than ignore tiny scattered amounts
- Improved retirement outcomes — money that would otherwise be eroded by charges is preserved and invested
What to Watch Out For
- Valuable guarantees — some older pots may have guaranteed annuity rates or other protections. Check before consolidating
- Employer contributions — ensure transferring does not affect any matching contributions from your current employer
- Exit charges — while capped at 1% for most workplace pensions, some older pots may carry exit penalties
- Investment strategy — a pot invested in a growth fund might perform differently from your default workplace pension fund
Timeline and Implementation
The Pension Schemes Bill includes provisions for auto-consolidation, with implementation expected from 2027–2028. The exact timeline depends on the passage of legislation, the establishment of the clearing house infrastructure, and industry readiness. The scheme is likely to start with the largest master trusts and be rolled out in phases.
Next Steps
Start by tracing any pension pots you may have lost track of using the free Pension Tracing Service. Check whether any old pots have valuable guarantees before consolidating. If you want to consolidate now, contact your current pension provider to arrange transfers. For complex situations involving multiple pension types, an FCA-regulated pension adviser can help you decide the best approach.