Workplace pension participation nudges upwards but auto-enrolled savers should take action to maximise benefits

There has been a nudge upwards in workplace pension participation in the UK to 79% (22.6 million employees) in April 2021, from 78% in 2020, the Office for National Statistics revealed today. The ONS said that the growth was partly explained by ‘increased public sector employment driven by the government's response to the coronavirus (COVID-19) pandemic’. The report also noted that the uptake of workplace pension participation has stabilised in recent years: prior to the introduction of automatic enrolment in October 2012, participation levels were at 47% overall and just 32% in the private sector.

Adrian Lowery, personal finance expert at investing platform Bestinvest, comments: There has been a plateauing of pension saving as measured by participation rates in the last couple of years after the injection given to it by the introduction of auto-enrolment. But other data suggests that the amounts saved are still on an upward trajectory: the latest HMRC stats revealed that savers made total pension contributions worth £31.3bn in 2019-20, up from £27.9bn in the previous period. As the graph included in today’s ONS’s report shows, it is occupational defined contribution schemes that have been a major driver behind rising overall pension uptake.

It is to the vast majority of employees’ long-term financial benefit that auto-enrolment has helped to entrench personal pension saving in the UK. But workplace pension savers must beware sitting on their laurels. There are three key aspects to consider to build on the benefits of auto-enrolment.

1. Are you saving enough? It is easy for younger workers to just go along with the statutory amount, when they could be shoring up their financial well-being by upping their contributions. Anyone who is not contributing up to the level that their employer is prepared to match should consider raising their percentage to take advantage of this generous uplift.
   
   
2. Have you checked your fund(s)? The vast majority of employees are enrolled in defined contribution schemes, where the saver and their employer pay each month into a fund or selection of funds - which in turn will hopefully grow over the long term into a pot that will help to fund retirement. It is therefore up to the saver to get under the bonnet and make sure that their investments are suitable and working hard for them. Younger workers can if they wish choose slightly higher risk options with more growth potential as they have decades to ride out stock market volatility.
   
   
3. Where are all your pots? It has always been the case that workers have collected pensions as they move jobs, but never more so than in the 10 years since auto-enrolment was introduced. And many young employees of today are likely to end up with a real haul of multiple pots by retirement age if they do nothing. In the worst-case scenario, one could lose track of some of these and end up many thousands of pounds out of pocket. The Association of British Insurers has estimated that about 1.6 million pension pots worth nearly £20billion have been lost, often because people moved house and forgot to let their pension provider know.

Those who have amassed a variety of different pensions or very large sums over decades might consider seeking expert advice before doing anything drastic with them - or at least check that they won’t be clobbered with hefty fees or the loss of valuable benefits before moving them. But there are basically three options with multiple pots: keep them separate as they are, roll them into your latest workplace scheme, or put old pots into a self-invested personal pension (SIPP).

Keep them separate – but keep track

If you are happy with your pensions and your ability to manage them, then they can be left as they are, as is usually best for instance with a final salary scheme (see below). Even with defined contribution schemes, there might be exit penalties from an old pot, or there might be benefits that you lose if you transfer out.

Finally, if one or more of your pots are smaller than £10,000, there are potential tax advantages when you come to access them, which mean that you avoid charges under the lifetime allowance or triggering the money purchase annual allowance.

Conversely, on examining your older pots you might find that they are subject to high fees and poorly performing funds, in which case transferring them becomes attractive. Consolidation can also make admin easier when you come to access your pension.

Consolidate into your current workplace scheme

Transferring pots into one scheme makes administrative sense as it is easier to keep track of your pension and monitor the performance of the funds it is invested in.

Moreover, workplace pension schemes have tended to improve over the years, with a better choice of funds and lower fees, so it’s unlikely that an old pot will be a ‘keeper’ on these two counts. So a common strategy is to keep transferring your pot with you as you move jobs, and all other things being equal, this is eminently sensible.

Just make sure you are happy with the fees and fund choices in your new employer’s scheme.

Consolidate into a self-invested personal pension

It could be that you’re dissatisfied with the choice of investments in your workplace scheme, and so are reluctant to fold your old pots into it. Another rationale for not simply rolling old pots into your new scheme is related to accessing your pension savings. If you might want to take a 25% tax-free lump sum at pension access age (55 now, soon to rise to 57), many workplace schemes make it difficult to do this and keep contributing afterwards. So if you have a pension pot separate to the one you are paying into, a lump-sum can be taken from there instead.

So some savers like to feed old pots into a SIPP instead. These can be opened on a do-it-yourself platform like Bestinvest, in much the same way as you would an Individual Savings Account, and allow you a huge choice of funds to invest your pension savings in.[1]  If desired this can be a ‘hands on’ investment option, in terms of choosing funds from the wide range on offer, but SIPP providers also offer ready-made portfolios that provide an off-the-shelf diversified balance of investments. Bestinvest’s new Smart range of low-fee RMPs are also managed dynamically by Tilney Smith & Williamson’s investment team.[2]

Some keen investors prefer SIPPs over any workplace scheme because of the greater choice of investments, and this raises the question of whether to transfer a current company pension into a SIPP, as well as old pots. Here the key is whether your employer will allow you to, and whether they will continue to match contributions if you do so.  
 
Final salary pensions

Employers and pension providers have for years been trying to persuade savers to exit generous ‘defined benefit’ schemes, often in return for a lump sum. These are costly for businesses because of the long-term liabilities they entail. Generally speaking, final salary pensions are too good to surrender, however tempting the offer seems – and that is the view of the Financial Conduct Authority and the Pensions Regulator.

Because of scams and poor advice in this area, it is now a legal requirement of anyone offered a transfer value of more than £30,000 on a final salary pension to take financial advice from a firm authorised by the FCA to provide such specialist advice.

You’re also likely to be worse off if you transfer out of a defined benefit scheme into a defined contribution scheme - even if your employer gives you an incentive to do so. Likewise, if you have a final salary pension scheme with a former employer, it is probably a good idea to keep it rather than transferring it in any way.

NOTES

[1] Bestinvest has just removed the vast majority of ad hoc fees from its SIPP service.

[2] Active asset allocation by the investment team adjusts exposure to different markets and asset classes according to the market conditions and the outlook. The portfolios gain exposure through low-cost ‘passive’ investments that include ETFs and funds tracking conventional indices as well as ‘factor’ funds that hold baskets of securities that meet other rules-based criteria. Investors will still be able to choose from Bestinvest’s existing range of ready-made portfolios – which will now be badged as the ‘Expert’ range – which predominantly invest through ‘best of breed’, actively managed funds.