The Government is being called to implement drastic reform to the pension system as the "status quo is not fit for purpose", according to a report from the Institute for Fiscal Studies (IFS).
Nearly 20 million defined contribution pension pots worth under £10,000 are no longer being contributed to across the UK, according to new findings from the think tank.
The crisis of small, deferred pension pots has reached a total value of almost £30billion with more than 12.1 million of these pots are worth less than £1,000, containing over £4bn in investments.
This issue appears to be rapidly worsening, with data from five major pension providers showing an increase of almost two million deferred pots worth under £1,000 between 2020 and 2023.
Lower earners are disproportionately affected by the small pension pots crisis, IFS research reveals.
Nearly three-quarters of pension pots accumulated by the lowest third of earners will be worth under £5,000 over a nine-year period.
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Experts are calling for pension system reform
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This contrasts sharply with the highest-earning third, who see only one-fifth of their pots fall below this threshold.
Women face similar disadvantages, with over half of their accumulated pension pots worth under £5,000, compared to just one-third for men.
The IFS identifies key factors driving this disparity: low earnings, often from part-time work, low pension contribution rates, and frequent job changes.
The proliferation of small pension pots creates significant burdens for both savers and providers, the IFS warns.
Pension providers face fixed administration costs for each pot, making smaller ones uneconomical to manage.
This leads to higher charges being passed on to savers, resulting in lower returns on their investments.
Managing multiple small pension pots, rather than a single larger one, makes it harder for individuals to track their savings and make informed decisions, the IFS reports.
The risk of losing track of pension savings entirely is also heightened when savings are fragmented across multiple small pots.
Labour is being called to consider changes to the pension system
GB NEWSNearly one in five UK adults believe they have lost a pension pot, equating to approximately 8.8 million individuals, according to PensionBee.
"The IFS report highlights the urgent need to tackle the growing issue of small deferred pension pots, which not only create unnecessary complexity for savers but also increase costs across the pensions industry," says Lisa Picardo, Chief Business Officer UK of PensionBee.
She emphasises that reform is crucial, particularly with 12.1 million pots worth under £1,000 currently inactive.
Making consolidation the default for micro pots could help savers take control of their retirement savings and reduce the likelihood of lost pensions, Picardo suggests.
The Government's Pensions Dashboard infrastructure offers a potential solution to help track scattered pension savings.
This online tool will enable people to view information about all their pensions in one place, though the IFS notes this alone may not drive consolidation.
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Pensioners have struggled amid the cost of living crisis GETTY PensionBee's Picardo stresses that successful small pot consolidation depends heavily on the dashboard being implemented effectively. "This adds further urgency to ensuring the dashboard is delivered in a way that enables savers to track and consolidate their pensions with ease," she says.
In the meantime, savers are encouraged to proactively review and consolidate their pensions where possible.
Looking ahead, PensionBee advocates for a more comprehensive solution to the small pots crisis.
"The long-term goal should be to develop a system where savers can maintain a single pension throughout their working life," says Picardo.
She points to the lifetime provider model as a natural evolution that could reduce the need for constant consolidation.
However, Picardo emphasises that any changes must prioritise savers' best interests, particularly those with smaller pots who may face higher fees.
"The priority for policy makers must be to simplify pensions, reduce costs, and improve retirement outcomes," she concludes, adding that broader structural reform will be needed.
