Auto-enrolment has seen more people saving for their retirement by building up a private pension through their contributions and those of their employer. But an unintended consequence of such a system has resulted in a ‘small pots problem’. The Chancellor Jeremy Hunt thinks he has a solution to that – a ‘pot for life’.

In his Autumn statement last November, Hunt certainly provided a good deal to think about. One thing that struck me about his speech and the accompanying documents was some of the language used when talking about the changes to pensions and Isas.

There was a clear sense of the Consumer Duty in action with references to “good investor outcomes” and “taking a long-term view”. It’s encouraging to see this mindset of the consumer taking centre stage, with more choice and control, but there is a lot to consider, as well as much we don’t yet know.

Empowering consumers for good outcomes is definitely a step in the right direction, but would a pot or pension provider for life solve the engagement issue?

What else needs to be done to achieve the desired outcomes of getting people to make good financial decisions in the short, medium and long term?

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Will people suddenly be excited about their retirement prospects because they can access the same pension which was set up for them when they embarked on their first job? Will this make them more inclined to save more?

What are the product features and capabilities that will go around this single pot? How much investment will be needed from providers for such a solution?

And how will they offer that service in a way that is economically viable for the provider and delivers good outcomes for the consumer, while avoiding foreseeable harm?

It might be just me, but it feels as though the proposals create more questions than they answer. And I’ve not even raised the key questions around investment options and charges.

Let’s face it, a single pot isn’t a single pot that everyone will be signed up to. You will still need to be able to change single pot providers. How will employees engage with their pot for life? Will they get help growing it?

What happens when that pot for life is no longer right for them? Or if the company they worked at for their first job didn’t carry out the most effective due diligence on providers? What will prompt them to check if there could be a better solution out there? A change of job? A certain point in their career? A major life event?

In a world where many people are struggling financially now how do you motivate them to think about what they might need tomorrow?

Power to the people

In theory, under the new proposals consumers would have the power to ask their employer to pay into a pension product of their choice. This would put the consumer in control, for the first time, of where their workplace contributions are paid. If successful, this could stem the flow of new small pots and could reduce the need for so many pension transfers.

It could have the potential to strengthen the connection between the employees and their pension plans. Being empowered to make their own choice means a pension plan can then travel alongside individuals throughout their career. It belongs to them rather than their employer, which is a common misconception of the current arrangement.

If the appetite for engagement fails to materialise employees will continue in their existing plan which will, eventually according to the proposals, become the default as they change jobs.

In practice, would it all go as the government hopes or could it result in more unintended consequences? There are definitely challenges to consider.

It’s good for us to be talking about the issue and try to remove complexity wherever possible. But in doing so we don’t want to accidentally make things even more complicated.

As the government notes – “the original concept of a workplace pension was based on a model where an individual had a job for life.”

Now people may have several jobs throughout their working lives. Building up multiple pension pots is far from ideal. People may struggle to know what their total pension savings equates to.

But creating a new model is far from easy. Whatever happens, one thing’s for sure – advisers will always be there to help their clients navigate the pensions landscape.

Steve Owen is director of product management at Morningstar Wealth

The £400m rise on the total raked in during the same period last year continues an upward trend in the amount of tax levied on the assets of the deceased.

The average bill is on course to be £239,000 in the current tax year with around 30,000 families having to pay up, according to numbers run by Wealth Club. This represents an 11.5% increase from the £214,000 average paid three years ago.

The figures will only increase pressure on Chancellor Jeremy Hunt and his government colleagues to make changes to IHT in the Budget on 6 March.

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It remains unclear as to whether the government will act though, as they are reportedly concerned it would be portrayed as a tax cut for the wealthy.

Nicholas Hyett, investment manager at Wealth Club, commented: “The government’s income from death duties is going up. That makes changes to IHT policy a careful balancing act.

“Cutting rates might win votes, since many see IHT as an unjust grab for money that’s already been taxed once. But the revenue earned is playing an important part in the government’s spending programme, and a shortfall would need to be made up somewhere else.”

Stacey Love, tax and estate planning specialist at Canada Life, said: “It’s clear from the data that IHT receipts are on a trajectory to break all previous records. While records might be broken, in reality IHT yields far less for the Treasury than other wealth taxes, for example capital gains tax.

“No doubt the rumour mills will go into over-drive ahead of the Spring Budget around the future of IHT, but one thing is clear, as of today, IHT isn’t just a tax on the wealthy, due to rising house prices and frozen tax bands.

“While we wait to see, what, if anything the Chancellor has up his sleeve around the future of IHT, early planning can help reduce the liability to this tax by making full use of the available exemptions and gifts to trusts.”

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Laura Hayward, tax partner at Evelyn Partners, added: “IHT is harvesting more in revenue than was ever forecast as rising house prices and growth in investment assets have boosted the value of estates over the last couple of decades.

“This has drawn more estates, and more assets in each liable estate, over the threshold at which IHT kicks in, which has been frozen at £325,000 since April 2009. Modest property downturns as we have seen in the last year or so will do little to dent this trend.

“In recent years there has also been a Covid effect on mortality which has further increased the overall IHT take.

“Despite being paid by a small proportion of estates, IHT is widely unpopular and continues to attract attention as one of the taxes the Chancellor could look to cut at his spring Budget, in an effort to boost the Conservatives’ electoral outlook.”