Government Reforms Target the Growing Issue of Small Pension Pots in the UK

The UK government has unveiled major reforms aimed at solving the persistent problem of small, forgotten pension pots—a growing issue for millions of workers who change jobs regularly and accumulate multiple workplace pensions over time.

Currently, the UK has over 13 million small pension pots, each worth £1,000 or less. This number is expected to increase by around one million per year, making it harder for individuals to manage their retirement savings and leading to reduced pension outcomes due to multiple flat-rate fees. The situation also creates a significant administrative burden for pension providers, costing the industry an estimated £225 million annually.

What Is Changing?

As part of the Pension Schemes Bill, the government will introduce automatic pension consolidation for small pots into a single scheme that meets strict standards, including offering good value for savers. This “pot for life” model aims to streamline pension management and improve retirement outcomes.

Savers will still have the right to opt-out if they prefer to keep their small pots separate.

Key Benefits of the Pension Pot Reform

These pension reforms are expected to:

• Eliminate multiple flat-rate charges, saving individuals money
• Make pension management simpler and more transparent
• Reduce admin costs for pension schemes and providers
• Boost long-term pension value — the average worker could see an increase of around £1,000 in retirement savings

How Will Pension Consolidation Work?

The proposed system includes:

• A Small Pots Data Platform to help identify and match pension pots belonging to individuals
• Defined criteria for schemes that qualify as “consolidators”, ensuring scale, value, and consumer protections
• An opt-out mechanism for those who wish to manage their pensions independently

Industry Response

The pensions industry has broadly welcomed the reforms. Organisations like the Pensions and Lifetime Savings Association, Which?, and leading providers support the move, citing reduced complexity and improved pension outcomes for savers.

What Should Employers and Savers Do?

With the Pension Schemes Bill set to be introduced to Parliament later this spring, now is a good time for:

• Employers to review their workplace pension schemes and staff communications
• Savers to consider reviewing and consolidating pension pots, even those above £1,000, for better control and performance

If you have multiple pension pots from previous employment, consolidating them into one well-performing scheme can lead to higher returns, lower fees, and greater retirement confidence. For more information, view the official announcement here: Government News on Pension Pot Reform