With all recent talk about the government’s pension reforms and new terms like ‘megafunds’ flying around, it’s easy to feel overwhelmed. Let’s cut through the jargon and look at what it all means for you.
Recently, the government announced some notable pension reforms, which are set to be introduced through the Pension Schemes Bill. Some of the reforms concern multi-employer defined contribution (DC) pension schemes, most commonly offered via the workplace. Therefore, this news is important for a good part of the population.
So, what does it all mean?
The megafund model
A megafund is a pension scheme which manages at least £25 billion in assets. Providers are expected to be managing this amount by 2030 or at least prove that they will be by 2035. Schemes that can’t prove their ability to reach this by the required dates, will no longer participate in auto-enrolment and are expected to wind up or consolidate their assets.
Australia and Canada have both embraced the megafund model, with evidence showing that megafunds of this size allow for a broader range of investments to be made, especially in large scale infrastructure and promising small businesses.
Small Pot Consolidation
The government has also announced plans to consolidate (transfer) small pension pots. Pots with less than £1,000 each will be automatically combined into one pot. This helps to build a stronger investment portfolio and potentially higher returns.
With consolidation, there is always the risk of losing the benefits associated with your pot. In the unique case of the government’s automatic consolidation of small pots, seeking advice could be a valuable option. From discussing your small pot consolidation options to your right to opt-out, you can get ahead of the game and make an advised decision that’s in your best interest.
Why has the government introduced these reforms to the UK?
The government is attempting to achieve two outcomes simultaneously. On the one hand, it wants to achieve better returns for people’s pension pots, ensuring they are invested in schemes that offer potential for higher returns. From consolidation alone, the government claims that “the average earner could get a £6000 boost to their pension pots”. On the other hand, the government wants to unlock the value of the nation’s pension pots to boost the UK economy. Specifically, the reforms could secure “over £50 billion investment in UK infrastructure, new homes and fast-growing businesses”.
To set the scene, infrastructure investments require vast sums of money, but the returns at the end can be attractive. The nature of megafunds and their higher valued management of assets, works to make this a reality- seeking to help the economy and the nation’s savers at the same time
How you can play your part
The government seems to be working hard to ensure pension reforms that benefit both the nation and its people. But you are not completely powerless in this and taking a proactive approach to stay up to date with what these reforms could mean for your pension is vital.
Take small pot consolidation, for example. You can start by using the Government’s free Pension Tracing Service. By entering a few of your details, you can find where these pots may be and which providers they are with- especially important if you have been down multiple career paths. You can then contact these providers for specific details and have your say in how your small pots are consolidated.
Then, you can seek advice from an IFA, like the team at My Pension expert, who can help to ensure you are making decisions, including consolidation, that are in your best interest. Also, an adviser can help guide you through any changes and set you on the path that has the best chance for you to achieve your retirement goals.
Remember: pension reforms are evolving, but taking an active role in understanding your pension can help you stay in control.
