THAT'S POTTY
King’s Speech 2024 reveals huge pensions shake-up that could add over £11,000 to retirement pots
The government has announced a raft of pension changes to help savers get better outcomes in retirement
THE government has announced a huge shake-up to pension schemes that aims to add over £11,000 extra to a typical retirement pot.
In the King's Speech today, it was confirmed the government will introduce a new Pension Schemes Bill which will aim to improve outcomes for savers in retirement.
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The Bill will include a raft of new measures to help over 15 million savers save up more for later life.
The aim is to ensure the average earner has over £11,000 more in their pension pot by the time they retire.
It comes as data suggests millions of savers are not putting enough money aside for later life.
Think tank The Resolution Foundation has estimated around 13million people are currently not saving enough to meet the minimum target for an adequate retirement.
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To help pension savers, the Pension Schemes Bill will include the following changes:
- A new system to enable small pension pots to be automatically combined into one place, helping to get better returns and helping savers keep track of their pensions.
- Ensuring all savers are saving into pension schemes which must demonstrate they are delivering "value for money" through a new test.
- A new requirement for pension scheme trustees, who oversee the running of pension schemes, to offer retirement income products to savers and guide them on which are most suitable.
- Creating new "superfunds" by consolidating "defined benefit" (DB) pension schemes, which pay a guaranteed income for life
- Changing the definition of a "terminal illness" to allow eligible savers to receive a lump sum payment earlier.
- Strengthening the power of the Pensions Ombudsman to help reduce costs.
The government estimates that combining small pension pots, guiding savers on which retirement products to use and introducing a "value for money" framework may lead to around 9% higher pension pots at retirement for an average earner.
Steve Watson, director of policy & research at savings firm Cushon, said it's "fantastic" to see Labour pushing through work carried out by the previous government.
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"These issues, like value for money and consolidation of small pots, are largely uncontroversial and it can only be good news [for savers] that the change in regime hasn’t interrupted the progress of this Bill," he said.
Simon Kew, head of market engagement at pension consultancy Broadstone, added: "The government’s analysis suggests that it will increase pot size at retirement by as much as 9% for the average earner contributing to a pension over the course of their career, which will be a major boost for savers."
Tom Selby, director of public policy at pension provider AJ Bell, added that the new Pension Schemes Bill will also use millions of people's pension pots to drive investment in the UK, boosting economic growth long-term.
"The claim the measures could deliver bigger pensions needs to be taken with a pinch of salt, as ultimately this will depend on the performance of your investments," he said.
"It is, of course, possible that this package of reforms will result in better investment returns for members – but this is never guaranteed."
We have broken down some of the policies in the Pension Schemes Bill below and what they mean for savers.
Other announcements in the King's Speech
Here are some of the other pledges announced today:
- Immigration cops will be given counterterror-style powers to target small boat smuggling gangs
- Football fans will be protected from dodgy owners who risk wrecking their club’s finances and heritage
- Rail and bus services will be brought back into public ownership
- Yobs will be targeted in a crime blitz with more community support cops to walk the streets
- Hated "no fault evictions" will finally be banned in England for renters
- A new Children’s Wellbeing Bill has been proposed to “remove barriers to opportunity” for kids
- A major crackdown on smokers and vapers is set to be revived by the new Government
Consolidating small pension pots
In a document published today, the government said it will aim to prevent people from losing track of their pension pots by consolidating "small pots" automatically.
"This will enable an individual’s deferred small pots to be
automatically brought together into one place to maximise income in
retirement, and deliver value for every saver," it said.
Millions of people are estimated to have lost track of significant sums of money in old pension pots.
Recent research by provider PensionBee found around one in ten workers believe they are missing a pension pot worth £10,000 or more - equating to more than three million Brits.
Mr Selby said: “The government is intent on pushing forward with greater consolidation of pension schemes, in part to improve the value members receive and in part to help deliver greater levels of investment into the UK.
"For individuals, there can also be benefits to taking control and combining your retirement pots, including potentially lower charges, more choice and easier administration."
How to track down lost pensions worth £1,000s
Value for money framework
The Pension Schemes Bill will bring in a new "value for money" framework, which will require pension schemes to pass a standardised test to demonstrate they are delivering value.
"This should result in consolidation in the pensions market by leaving a smaller number of well- performing, well governed schemes which will not only improve outcomes for savers, but is likely to lead to more productive investment of funds," the government said.
The City watchdog, the Financial Conduct Authority, will be responsible for ensuring this is applied consistently across all pension schemes.
Requiring pension schemes to offer retirement products
One of the more radical plans in the new Bill is the proposal that pension schemes must offer retirement products to savers.
The Department for Work and Pensions (DWP) has previously confirmed its intention to make trustees have a legal duty to provide a default retirement product for savers who don't make an active decision themselves.
But the government has now confirmed it will place duties on pension scheme trustees, who manage pension schemes, to offer pension savers options about how to take their income when they retire.
Recent research has found that almost three quarters of savers withdrew money from their pension before they actually retired.
The research by Scottish Widows found savers typically took out £47,000 before leaving work, meaning they had less for later life.
The intention is that by offering products to savers will keep them invested for longer rather, meaning their pension pot will continue to grow.
"This will improve outcomes for savers and is likely to lead to more funds being invested for longer, giving the potential for investments in productive assets – boosting economic growth," it said.
Kirsty Anderson, retirement specialist at Quilter, said: “By placing duties on trustees of occupational pension schemes to offer a retirement income solution or range of solutions, including default investment options, the government hopes to improve outcomes for savers and lead to more funds being invested for longer."
This is a huge step in the right direction for pension savers
By Laura Purkess, The Sun's consumer features editor and consumer champion
WHILE many of the plans announced today were already in the works, confirmation that they will happen via the Pension Schemes Bill is a huge win for pension savers.
It's widely acknowledged that millions of workers are simply not saving enough for retirement and aren't engaged with their pensions, but action to tackle this has been slow.
So, any further measures that could help to boost savings and encourage people to plan for later life should be warmly welcomed.
While the pensions dashboard - which will allow savers to view all their pensions in one place - is finally on the horizon after repeated delays, it is still over two years away, but we need to take action to improve retirement savings now.
The consolidation of small pots could contribute to helping savers keep track of their cash, while requiring schemes to provide retirement solutions for savers makes sense.
With hardly any savers able to access proper financial advice, this could help ensure they aren't left floundering.
The government has previously said it will carry out a review into workplace pensions at some point during this term, so hopefully that will lead to even more radical measures in future.
Defined benefit superfunds
The documents published today also confirmed plans to consolidate some defined benefit (DB) schemes to help protect savers and boost investment.
DB schemes, also known as "final salary" schemes, are where savers receive a guaranteed income for life once they retire.
But many savers in old DB schemes are at risk of losing part of their income if their employer goes bust, the government said.
By combining some of these funds into "superfunds", employees would be more protected from any issues with their company.
It also said combining the funds would enable "more productive investment" of the pension cash.
"DB schemes hold around £1.4trillion in assets across around 5,000 pension schemes. The measures in this Bill will enable consolidation and more productive investment of funds," it said.
Missing pension policies
While the Pension Bill included a lot of detail, experts have noted several expected policies are absent from the King's Speech.
One of those is changes to automatic enrolment, which is where savers automatically join a new workplace pension when they start working for a company.
Experts have been expecting the government to address the shortfall in retirement savings by changing the amount savers have to earn to be automatically enrolled, as well as lower the minimum age from 22.
Mr Selby explained: “One key thing missing from this Bill is any mention of scaling up automatic enrolment.
"There is wide agreement that minimum contributions under auto-enrolment will need to rise, and a 2017 review recommended removing the lower earnings band and reducing the minimum qualifying age to 18 as a starting point.
"The legislation for these changes is ready to be delivered – the big question is when will it happen? By removing the lower earnings band, savers will benefit from an extra £500 a year into their pension, which would make a big difference."
Tom McPhail, director of public affairs at consutlancy The Lang Cat, added that most of the current plans were already in progress and new plans could come further down the line instead.
"This means work has already been done on them, they’re relatively uncontroversial and should enjoy support from employers and the pensions industry," he said.
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"It appears any more radical reforms to the pension system will wait until the government has completed the review it promised during the election campaign."
What are the different types of pensions?
WE round-up the main types of pension and how they differ:
- Personal pension or self-invested personal pension (SIPP) - This is probably the most flexible type of pension as you can choose your own provider and how much you invest.
- Workplace pension - The Government has made it compulsory for employers to automatically enrol you in your workplace pension unless you opt out.
These so-called defined contribution (DC) pensions are usually chosen by your employer and you won't be able to change it. Minimum contributions are 8%, with employees paying 5% (1% in tax relief) and employers contributing 3%. - Final salary pension - This is also a workplace pension but here, what you get in retirement is decided based on your salary, and you'll be paid a set amount each year upon retiring. It's often referred to as a gold-plated pension or a defined benefit (DB) pension. But they're not typically offered by employers anymore.
- New state pension - This is what the state pays to those who reach state pension age after April 6 2016. The maximum payout is £203.85 a week and you'll need 35 years of National Insurance contributions to get this. You also need at least ten years' worth to qualify for anything at all.
- Basic state pension - If you reach the state pension age on or before April 2016, you'll get the basic state pension. The full amount is £156.20 per week and you'll need 30 years of National Insurance contributions to get this. If you have the basic state pension you may also get a top-up from what's known as the additional or second state pension. Those who have built up National Insurance contributions under both the basic and new state pensions will get a combination of both schemes.
We've rounded up how the measures announced today could affect your finances
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