PFS What's new bulletin - February I

TAXATION AND TRUSTS

 

HMRC urges companies against involvement in corporation tax avoidance scheme

(AF2, JO3)

 

HMRC recently issued a warning to companies against involvement with a scheme which has been marketed as ‘The Partnership Model’, whereby a company’s employees agree that their contract can be altered or ended, on the premise that they will receive a compensation payment as part of the agreement.

 

The employee’s employment contract is then terminated or amended and a limited liability partnership (LLP) is subsequently formed, with the employee then becoming a partner of the LLP. The compensatory sum, along with any additional payments received, are then deemed to be a capital contribution to the LLP.

 

It should be noted however that the employee in the LLP does not actually receive the compensation or other related payments – in fact they continue to receive the same remuneration net of tax that they received prior to the termination of their contract. A key difference is that income tax and national insurance contributions are not deducted from the payment and no payments are made to HMRC.

 

The company employees concerned are encouraged to register as a partner for self-assessment tax purposes, and will then be required to submit annual self-assessment returns to HMRC, allowing the promoter of the scheme to act as their agent.

 

HMRC has issued a stringent warning to companies who may be involved with this or similar types of arrangement to disassociate from it and arrange to pay any outstanding tax liabilities to HMRC. This will help to reduce interest and charges accruing on unpaid tax and reduce the likelihood of incurring costs for investigations being carried out and possible legal action.

The Government has stated ‘Scheme promotors must comply with the disclosure of tax avoidance schemes legislation, making sure that arrangements they are marketing are disclosed to HMRC’ and ‘Promoters will be liable to a penalty if they fail to disclose a scheme to HMRC within five days of the scheme being made available or implemented.’

Fines of up to £600 a day apply for non-compliance or disclosure; however, if HMRC does not deem this to have been a successful deterrent, it may issue promotors with a fine of up to £1 million.

 

 

 

 

 

 

HMRC reduces late payment and repayment interest rates

(AF1, RO3)

 

The Bank of England Monetary Policy Committee announced on 6 February 2025 to reduce the Bank of England base rate to 4.5% from 4.75%. HMRC interest rates are linked to the Bank of England base rate. As a consequence of the change in the base rate, HMRC interest rates for late payment and repayment will reduce. These changes will come into effect on:

 

·         17 February 2025 for quarterly instalment payments;

·         25 February 2025 for non-quarterly instalments payments.

 

HMRC will update its information on the interest  rates for payments shortly. In the meantime, we have set out the updates below.

 

HMRC will decrease the current late payment interest rate applied to the main taxes and duties from 7.25% to 7%, effective from 25 February 2025.

 

The corporation tax pay and file interest rate has also been decreased in line with the general interest rate reduction to 7% from 25 February 2025.

 

The reduction applies to all other HMRC late payment rates, with an across the board decrease of 0.25% to 7%.

 

The exception is interest charged on underpaid quarterly corporation tax instalment payments, which decreases to 5.5% (from 5.75%) from 17 February 2025.

 

The repayment interest rate of 3.75% will decrease to 3.5%, from 25 February 2025.

 

How HMRC interest rates are set

 

HMRC interest rates are set in legislation and are linked to the Bank of England base rate. Late payment interest is currently set at base rate plus 2.5%. Repayment interest is set at base rate minus 1%, with a lower limit - or ‘minimum floor’ - of 0.5%. The differential between late payment interest and repayment interest is in line with the policy of other tax authorities worldwide and compares favourably with commercial practice for interest charged on loans or overdrafts and interest paid on deposits.

 

On 30 October 2024, the Government announced that it will increase the late payment interest rate charged by HMRC on unpaid tax liabilities by 1.5 percentage points. This measure will take effect from 6 April 2025.

 

 

 

 

 

 

 

 

 

HMRC update re in-year 2024/25 trust and estate tax returns

(AF1, JO2, RO3)

 

HMRC’s information about filing in-year returns for trusts and estates.

 

In-year returns are tax returns which are submitted before the end of the tax year to which they relate. This may be done when an individual has died, an estate has been wound up or a trust has closed. Filing early on paper, before 5 April, can help to bring the affairs of the individual, estate or trust to conclusion more quickly. Generally, a paper version of the previous year’s return is used, with manual amendments made on the face of the return to show the year which is being reported.

 

Given the changes to capital gains tax (CGT) rates for non-residential disposals on 30 October 2024, trusts and estates which need to pay the new rates of CGT are being asked not to file 2024/25 returns until after 5 April 2025.

 

HMRC has told the Association of Taxation Technicians (ATT) that it will continue to accept in-year returns for individuals who have died and who are reporting using an SA100 even if there is CGT involved, but have added that it would be helpful if agents/taxpayers could identify any disposals on or after 30 October 2024 which need to be taxed at 18/24% and include their calculations.

 

Estates reporting informally can continue to report in-year. However, trusts and estates using the formal reporting method and submitting SA900 returns which have non-residential CGT disposals after 30 October, are being asked to wait until the 2024/25 SA900 return is published to ensure that the correct rate of CGT is applied. 

 

HMRC has provided the ATT with the following message: 

 

“I am contacting you following the changes announced by the government at Autumn Budget 2024 to the rates of Capital Gains Tax (CGT).

 

Trustees/Personal Representatives (PRs) have previously been able to file in year Self-Assessment Returns (SA905) using the previous tax years form under ‘a collection and management measure’. Due to the in-year change for the 2024-25 tax year only, for customers with disposals on or after 30 October 2024, a manual workaround will be required to ensure the new rate of tax is correctly accounted for in the return. This will involve using an adjustment box which has been added to the SA905 to account for the in-year difference in tax.  

 

Therefore, use of the 2023/24 tax return for 2024/25 will cause an issue for some customers, as the return does not have the ability to capture the two rates of CGT, so we cannot accept some in year returns.  

 

We can accept 2024/25 in year returns that have:

 

·         UK property disposals only as there is no change to the CGT rate

·         Any disposals made before 30 October 2024 

 

 

We cannot accept:

 

·         any return with multiple main rates of CGT for disposals on or after 30 October until the 2024-25 return is available in April 2025. Returns that have already been sent will be returned to trustees/PRs. 

 

An adjustment tool will be available alongside the updated 2024/25 return to support a trustee/PR to calculate the correct adjustment figure.”

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INVESTMENT PLANNING

 

NS&I rate changes

(AF4, FA7, LP2, RO2)

 

NS&I has announced three interest rates reductions and one increase. The changes are shown below:

 

Product	Old rate	New rate	Effective from
Direct ISA	3.00%	3.50%	18/2/2025
Direct Saver	3.50%	3.30%	5/3/2025
Income Bonds	3.44%/3.49% AER	3.26%/3.30% AER	5/3/2025

 

NS&I will lower the prize rate for premium bonds from 4.00% to 3.80 % tax free from 1 April. The odds of winning will remain at 1 in 22,000.

 

The pattern of April’s prize distribution is detailed below along with the March for comparison.

 

	Mar-25	Apri-25
Odds of monthly win:	1:22,000	1:22,000
Prize rate	4.00%	3.80%
£1,000,000	0.000034%	0.000034%
£100,000	0.001392%	0.001322%
£50,000	0.002818%	0.002660%
£25,000	0.005586%	0.005304%
£10,000	0.013973%	0.013235%
£5,000	0.027979%	0.026520%
£1,000	0.293324%	0.278671%
£500	0.879973%	0.836012%
£100	33.972918%	31.024470%
£50	33.972918%	31.024470%
£25	30.829084%	36.787303%

Comment

 

The ISA increase reflects both the impending tax year end and the uncompetitive rate NS&I were offering. The new rate is still well below the chart toppers, all of which are offering at least 1% more. Similarly, the Direct Saver and Income Bonds lag well behind leading instant access rates. Premium Bonds remain theoretically attractive, primarily for higher and additional rate taxpayers.

 

 

January inflation numbers

(AF4, FA7, LP2, RO2)

 

The UK CPI inflation rate for the January 2025 was 3.0%, 0.5% up from December.

 

 

The CPI annual rate for January was 3.0%, 0.5% higher than December and 0.2% above market expectations.  

 

The UK CPI reading was down 0.1% between December and January, which sounds not too worrying until it is compared with a 0.6% decline in the corresponding period in 2023/4. The CPI/RPI gap narrowed by 0.4% with the RPI annual rate rising by just 0.1% to 3.6%. Over the month the RPI index fell by 0.1%.  

 

The ONS’s favoured CPIH index was up 0.4% at an annual 3.9%, its unusually high margin above the CPI thus narrowing slightly. As we have regularly said in recent months, a large part of that excess is due to the owner occupiers’ housing (OOH) category, which now has a 17.0% weighting in the CPIH but is absent from the CPI. The OOH inflation rate remained at 8.0%, the highest since February 1992, when the rate was 8.6% in the constructed historical series.  

 

The ONS attributed the higher CPIH inflation to different divisions pulling in opposite directions, with the upward pulls being the strongest: 

 

Main upward drivers 

 

Transport Overall prices in the transport division rose by 1.7% in the year to January 2025, compared with a fall of 0.6% in the year to December 2024. On a monthly basis, prices fell by 0.5% in January 2025, compared with a fall of 2.8% a year ago. 

 

The change in the annual rate was mainly the result of upward effects from air fares and from motor fuels, partially offset by a downward effect from secondhand cars.

 

Food and non-alcoholic beverages Food and non-alcoholic beverage prices rose by 3.3% in the year to January 2025, up from 2.0% in December 2024. Prices for this division rose by 0.9% in January 2025, against a monthly fall of 0.4% a year ago. The annual rate of 3.3% in January 2025 compares with 7.0% to January 2024 and a low of 1.3% hit in August 2024. 

There were upward contributions to the change in the annual rate of inflation between December 2024 and January 2025 in seven of the eleven food and non-alcoholic beverages classes. This is because prices rose this year but either fell or rose at a slower rate between the same two months last year.    

 

Education The annual inflation rate for education was 7.5% in the year to January 2025, up from 5.0% in December 2024. On a monthly basis, prices rose by 2.4% in January 2025, but did not change a year ago. Education has only a 3.1% weighting in the CPI. 

 

The only item that changed price in the education division was private school fees, where prices rose by 12.7% on the month but were unaltered a year ago. The ONS dryly notes that “A contributing factor to the rise in private school fees may [our italics] have been education and boarding services provided by private schools becoming subject to VAT at the standard rate of 20%.” 

 

Main downward driver 

 

Housing and household services  The annual inflation rate for housing and household services was 5.6% in the year to January 2025, down from 6.0% in December 2024. On a monthly basis, prices rose by 0.5% in January 2025, compared with a rise of 0.9% a year ago. 

 

The 0.4 percentage-point decrease in the annual rate between December 2024 and January 2025 was mainly the result of downward effects from gas and electricity costs. Gas prices rose by 1.3% between December 2024 and January 2025 having risen by 6.8% a year ago. Electricity prices rose by 1.2% between December 2024 and January 2025, having risen by 4.0% a year ago. 

 

Six of the twelve broad CPI divisions saw annual inflation increase, while six fell and. The categories with highest annual inflation rate are now Education (7.5%), Communication (5.9%) and Health (5.0%). The two divisions (Furniture; Household Equipment and Maintenance; and Transport), that posted an annual deflation in December have now returned to recording annual price rises.  

 

Core CPI inflation (CPI excluding energy, food, alcohol and tobacco) rose 0.5% to 3.7%, in line with market expectations. Goods inflation in the UK rose from 0.7% to 1.0%, and services inflation retraced December’s fall, rising by 0.6% to end up back at 5.0%.  

 

Producer Price Inflation input prices fell by 0.1% in the 12 months to January 2024, against a revised figure of –1.3% in the year to December 2024. The corresponding output (factory gate) figures saw a 0.3% annual rise against a previous revised -0.1% fall.   

 

Inputs of fuel provided the largest downward contribution to the input PPI annual inflation rate in January 2025, falling by 14.0%. Outputs of coke and refined petroleum products provided the main downward contribution to the output PPI annual inflation rate in January 2025, falling by 14.1%. 

 

COMMENT 

 

The larger than expected rise in CPI will not be welcome news for the Chancellor. It makes it more difficult for the Bank of England to cut interest rates, which in turn adds to the Treasury’s £100bn+ debt servicing costs. Yesterday’s ONS annual earnings growth data (5.9% without bonuses, 6.0% with) will also give the Bank pause for thought.  

The next big crunch will arrive with the April data, due mid-May, when the impact of higher utility bills (gas, electricity and water) kick in alongside any remaining prices rises in response to the increases in the National Living Wage and employer’s NICs.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PENSIONS

 

FCA: Evaluation Paper 25/1: Our ban on contingent charging and other remedies in 2020: effects on market structure, pricing, and uptake of advice

(AF8, FA2, JO5, RO4. AF7)

 

The Financial Conduct Authority (FCA) introduced a ban on contingent charging in October 2020 as part of a wider set of remedies aimed at improving outcomes in the Defined Benefit (DB) pension transfer advice market. They have now issued a paper analysing its impact: Evaluation Paper 25/1: Our ban on contingent charging and other remedies in 2020: effects on market structure, pricing, and uptake of advice. Alongside the EP 25/1, they have also issued a Technical Annex. While it is not a comprehensive review of the ban's effectiveness on advice suitability, it provides insights into its financial and structural implications.

 

The evaluation found that the contingent charging ban had its intended impact, reducing the number of firms offering DB transfer advice and the number of consumers transferring. However, advice costs did not decline as expected, and other market forces also played a significant role in shaping outcomes.

 

1.      Impact on Market Structure

 

Reduction in Firms Providing DB Transfer Advice

 

• The number of firms offering DB transfer advice declined significantly after the ban was announced.
• Between 129 and 195 firms exited the market within two years after the ban, reducing competition.
• The decline was likely caused by multiple factors, including:
• The ban on contingent charging, making DB transfer advice less profitable.
• Rising professional indemnity insurance (PII) costs.
• Increased regulatory scrutiny and enforcement.
• Falling transfer values due to rising gilt yields.

 

Impact on Firm Behaviour

 

• Some firms left the market in anticipation of the ban.
• Others stopped offering DB transfer advice altogether rather than switching to a non-contingent charging model.
• Firms that remained in the market became more selective, only advising cases where a transfer was more likely to be recommended.

 

2.      Impact on Pricing of DB Transfer Advice

 

Fees Did Not Decline as Expected

 

• The FCA initially estimated that the ban would reduce full DB transfer advice costs by £2,500 - £3,500 per consumer.
• However, advice fees remained stable or even increased slightly.
• Before the ban, fees for those recommended to transfer averaged £5,500–£6,900.
• Post-ban, they stabilised at around £7,100, reaching a peak of £7,300 in March 2022.
• This suggests that rather than lowering fees, firms passed costs onto consumers who did proceed with a transfer.

 

Abridged Advice: A Lower-Cost Alternative

 

• The FCA introduced abridged advice to help consumers access initial guidance at a lower cost.
• Many firms adopted abridged advice, and some even offered it for free.
• Consumers who were recommended not to transfer paid between £600–£900 on average.

 

Increase in Advice Fees for Those Not Transferring

 

• Before the ban, those advised not to transfer often paid little or nothing, as fees were cross-subsidised by those who transferred.
• Post-ban, firms had to charge the same fee regardless of outcome, leading to higher costs for those who did not transfer.

 

3.      Impact on Uptake of Advice

 

Fewer Consumers Seeking DB Transfer Advice

 

• The ban led to a sharp reduction in the number of consumers receiving DB transfer advice.
• The number of consumers transferring fell from 32,452 in 2019/20 to just 3,981 in 2023/24.
• Fewer consumers proceeded with transfers, possibly due to:
• Higher upfront advice costs.
• Falling transfer values.
• Negative publicity around unsuitable DB transfer advice.

 

Higher ‘Conversion Rate’ Among Those Who Took Advice

 

• The proportion of consumers recommended to transfer (conversion rate) initially increased after the ban.
• This suggests that firms prioritised cases where a transfer was more likely.
• However, the conversion rate later declined, likely due to market conditions rather than the ban itself.

 

4.      Other Broader Impacts

 

Impact on Ongoing Advice and Product Charges

 

• The FCA expected more consumers to transfer into workplace pension schemes (WPS) to reduce ongoing costs.
• While there was some increase in WPS transfers, they remained a small proportion of total transfers.
• There was no evidence of widespread gaming of the ‘insistent client’ loophole or the ‘carve-out’ exemption.

 

Professional Indemnity Insurance (PII) Costs

 

• Firms offering DB transfer advice faced rising PII premiums, which further reduced market participation.
• PII costs more than doubled for firms in the sector from £23,638 in 2019 to £50,438 in 2022.
• Firms with a history of contingent charging faced particularly high PII costs.

 

5.      Lessons Learned

 

The FCA's evaluation highlighted three key takeaways:

 

1. The ban had a greater impact on market participation than pricing.
• The number of firms providing DB transfer advice declined significantly, but advice fees remained high.
2. The Cost-Benefit Analysis (CBA) broadly supported the intervention.
• Despite some unintended consequences, the overall impact aligned with expectations.
3. The announcement of the ban had a greater impact than the ban itself.
• Many firms left the market before the ban came into force, suggesting a strong anticipatory effect.

 

Conclusion

 

The FCA's ban on contingent charging successfully reduced conflicts of interest in DB transfer advice but also had unintended consequences:

 

• Fewer firms offer DB transfer advice, reducing consumer choice.
• Advice costs remained high, limiting accessibility.
• Fewer consumers proceed with transfers, potentially protecting those who would have made poor financial decisions.

 

While the FCA views the intervention as a necessary step to improve market integrity, further reforms may be needed to ensure access to high-quality, affordable advice.

 

 

 

 

 

 

 

 

 

 

DWP Permanent Secretary provides update on state pension correction exercise

(AF8, FA2, JO5, RO4)

 

Peter Schofield, Permanent Secretary at the DWP, has been giving oral evidence to the Work and Pensions Committee (HC688). He has provided an update on the DWP's work to address historical state pension underpayments, confirming that the DWP has been through over 800,000 records and has paid out more than £700m over a three-year period. He confirmed that the DWP has “basically finished” its State Pension correction exercise. Additionally, it is also making “good progress” to address Home Responsibilities Protection (HRP) errors.

 

He then went on to highlight broader improvements, noting that the DWP has been moving state pension records on to a new, modern platform. He added: “At the heart of this — this is something for the Committee to think about in the context of policy change in the future — is thinking about the value of going for a more simplified benefits system, as we have seen with the new state pension or with universal credit. You reduce the risk of human error as part of the process, and you make it easier to automate processes and get money to people more quickly.”

 

 

ATT: IHT on pensions could delay probate

(AF8, FA2, JO5, RO4)

 

The Association of Taxation Technicians (ATT) has warned, in a Press Release, that the plan to charge inheritance tax (IHT) on unused pension pots could lead to delayed probate agreements and higher costs for 50,000 families a year and have a negative impact on families trying to sort out estates after the death of a relative.

 

From April 2027, any unused pension funds or death benefits will be included within the value of an individual’s estate on death and be subjected to inheritance tax. Currently excess pension pots generally fall outside the scope of IHT.

 

This will remove the opportunity for individuals to use pensions as a vehicle for inheritance tax planning by bringing unspent pension pots and death benefits payable into the scope of inheritance tax from 6 April 2027, which will affect around 8% of estates each year, equivalent to around 50,000 families.

 

Currently, those managing the affairs of the deceased, known as personal representatives, must only inform Pension Scheme Administrators (PSAs) of the death of an individual.

The ATT flagged significant changes from 2027, where under the new proposals, personal representatives will have to liaise with PSAs to establish the value of unused pension assets and allocate any allowances to allow PSAs to calculate their share of any IHT bill.

 

Each pension fund will then need to pay their share of IHT to HMRC before personal representatives can apply for probate.

 

The ATT has warned that the new requirements will result in increased costs, time and stress of the additional administration work, and beneficiaries could even run into financial trouble if probate is delayed. The association is calling for a separate IHT regime for pensions.

Jon Stride, vice chair of the ATT technical steering group, is quoted as saying: “The need to resolve the IHT position first, even if no IHT is ultimately due, is likely to delay when PSAs can pay income or lump sums out to survivors.

 

This could cause cashflow issues for some surviving spouses or partners. The measures may also catch out unmarried couples who were envisaging that any undrawn pension assets would be available to support the survivor, as the funds may first be reduced by an IHT charge. Married couples, in contrast, can continue to leave pension assets to each other free of IHT.

 

Given the administrative challenges, we think there would be merit in exploring a separate IHT regime for pensions which would help to meet the government's policy intention, without creating excessive burdens on personal representatives.”

 

Pensions are viewed as a very useful IHT planning tool so it will be necessary to review existing arrangements to ensure they are most tax efficient, although some have described tax free pension pots as something of a tax loophole.

 

Gary Smith, financial planning partner and retirement specialist at Evelyn Partners, commented that:

 

“It’s arguable that this consolidates the two tiers of the UK pension system, as the change removes one of the few advantages that defined contribution pensions had over the gold-plated final salary schemes that now exist largely just in the public sector.”

 

 

IFS: Small pension pots: problems and potential policy responses

(AF8, FA2, JO5, RO4)

 

The Institute for Fiscal Studies (IFS) report, supported by the abrdn Financial Fairness Trust, entitled: “Small pension pots: problems and potential policy responses”. The report explores the growing challenge of small, deferred pension pots in the UK. The study highlights how the current pension system leads to individuals accumulating multiple small pension pots, making retirement planning more complex and less cost-effective. The report evaluates the scale of the issue, its impact on savers and pension providers, and potential policy solutions to improve efficiency and financial outcomes.

 

1.      Key Findings and Scale of the Problem

 

• There are currently around 20 million defined contribution (DC) pension pots with balances under £10,000 that are no longer actively contributed to.
• These small pension pots hold an estimated £30 billion in total assets, but over half (12.1 million pots) are worth less than £1,000, representing over £4 billion.
• The number of deferred small pots is rising rapidly:
• Between 2020 and 2023, the number of pension pots worth less than £1,000 increased by almost 2 million.
• If no policy intervention occurs, this trend will continue, further complicating pension management for savers and increasing administrative costs.

 

 

Who is Most Affected?

 

• Low earners and women are disproportionately impacted by small pension pots:
• Three-quarters of pension pots accumulated by low earners over a nine-year period are worth under £5,000.
• Over half (50%) of women’s pension pots are under £5,000, compared to one-third of men’s.
• The main reasons for this disparity include lower wages, part-time work, and more frequent job changes.

 

2.      Challenges of Small Pension Pots

 

i)                   Increased Costs and Lower Returns

 

• Pension providers face high administrative costs for small pots due to fixed fees, making them uneconomical.
• Higher charges on small pots lead to lower returns for savers.
• The Pensions Dashboards project will help individuals track their pensions, but it will not solve the problem of multiple small pots reducing retirement income.

 

ii)                 Difficulty Managing Pension Savings

 

• Many individuals find it challenging to track and manage multiple pension pots, increasing the risk of lost pension savings.
• Over three million pension pots, worth a total of £31 billion, are considered “lost”—meaning the pension provider is unable to contact the saver.
• Decision-making around saving, investing, and withdrawing pension funds is harder when funds are fragmented across multiple pots.

 

3.      Potential Policy Solutions

 

The report argues that the current system is not fit for purpose and calls for policy interventions to improve efficiency. The recommended solutions include automatic consolidation of small pension pots and reforming employer contribution processes.

 

i)                   Automatic Consolidation of Small Pension Pots

 

• The report strongly supports default consolidation, meaning small pension pots should be merged automatically unless the saver opts out.
• This approach would reduce the number of uneconomical pension pots, improving efficiency for both providers and savers.
• A central clearing house could facilitate automatic consolidation, ensuring smoother transitions between pension providers.

 

ii)                 Same-Provider Consolidation

 

• Many savers already have multiple pension pots with the same provider (from different employers).
• Automatically merging these pots into the one with the best fee structure would improve cost efficiency and increase savers’ returns.

iii)               Setting Limits on Consolidation

 

• The report suggests initially limiting automatic consolidation to pots under £1,000.
• Over time, this threshold should be increased to allow larger pots to be merged and avoid falling behind inflation.
• Raising the threshold to £5,000 or £10,000 could further simplify pension management and improve long-term retirement planning.

 

4.      Policy Debate: 'Pot Follows Member' vs 'Default Consolidator'

 

The report evaluates two main consolidation models:

 

1. "Pot Follows Member" Approach
• When a worker changes jobs, their pension automatically moves with them to their new employer’s scheme.
• Pros: Simplifies pension tracking and ensures savers keep contributions in a single pot.
• Cons: Could result in frequent fund transfers, impacting providers’ ability to invest in long-term assets.
2. "Default Consolidator" Model
• Deferred small pots are automatically merged into pre-approved consolidation schemes.
• Pros: Ensures savings go to authorised, well-managed funds.
• Cons: Fewer pension providers could lead to reduced competition in the market.

 

The report concludes that both approaches would be an improvement over the current system, but a "pot follows member" model could increase engagement with current pensions.

 

5.      Alternative Policy Approaches

 

i)                   "Member Choice" and the "Lifetime Provider" Model

 

• Member choice: Employees choose where their pension contributions go, preventing unnecessary new pension pots.
• Lifetime provider model: Workers remain with a single pension provider throughout their career.
• These models could prevent new small pension pots but might increase administrative burdens for employers.

 

ii)                 Charge Cap Adjustments

 

• The current 0.75% charge cap on pension funds could be revised downward to ensure savers benefit from lower fees.
• Automatic consolidation should prioritise merging pots into low-fee schemes.

 

 

 

 

 

6.      Conclusion

 

The proliferation of small pension pots is a growing financial issue in the UK, making retirement savings more complex and less efficient. The Institute for Fiscal Studies (IFS) argues that default consolidation of small pension pots would reduce costs, improve engagement, and enhance retirement savings.

 

Key Recommendations:

 

• Automatically consolidate small pension pots unless savers opt out.
• Merge multiple pots within the same provider to optimise fees.
• Start with a £1,000 consolidation limit, increasing over time.
• Adopt either a "pot follows member" or "default consolidator" approach to streamline savings.
• Reform employer contribution structures to prevent unnecessary new pots.
• Ensure transparent communication with pension holders to increase engagement.

 

By implementing these measures, policymakers can simplify pension savings, reduce costs for savers and providers, and improve long-term retirement outcomes for millions of UK workers.