IFS report warns small pension pots risk being lost or eroded by charges

The Institute for Fiscal Studies (IFS) has warned that millions of small pension pots risk being lost or gradually eroded by charges, according to a report covered by Which? on 20 February 2025¹. The IFS found that as of 2023 there were 20m defined contribution pension pots worth less than £10,000 that were no longer receiving contributions, and that more than half of these, 12.1m, were worth less than £1,000¹.

Based on information from five large pension providers, the number of deferred pots worth less than £1,000 rose by nearly two million between 2020 and 2023¹. Deferred pots are those left behind when a worker leaves an employer; under auto-enrolment a new pension is started with each new job, and the old one continues to be managed by its provider but receives no further contributions¹.

Charges vary widely by scheme age. For most workplace pensions set up under auto-enrolment, annual management charges are capped at 0.75%, with many schemes charging around 0.5%, or as little as 0.2% to 0.3% in some cases¹. The IFS found that deferred pensions set up in the 1990s have annual fees averaging over 1.1% of fund value¹. It estimated that a 50-year-old with a deferred pot of £21,000 could have £2,000 less by the time they reach state pension age at 67 if their annual fee is 1% instead of 0.75%, assuming investment returns of 7.7% per year¹.

The report found that women and lower earners are most likely to hold small pots. IFS modelling over a nine-year period found that nearly three-quarters of pension pots built up by the lowest third of earners will be worth less than £5,000, compared with just one in five among the highest earners¹. More than half of pension pots held by women will be worth under £5,000, compared with one in three for men¹. Which? attributes this partly to women being more likely to take career breaks or work part-time hours to manage childcare, meaning they typically contribute less over time¹.

The IFS recommended automatically consolidating small deferred pots under £1,000 into a saver's existing pension unless they opt out, and regularly increasing that threshold in line with inflation¹. It also suggested combining pots held with the same provider automatically, and a lifetime provider model in which workers stay with one provider throughout their career¹. It said the government's pensions dashboards, which will eventually let savers see all their pensions in one place, will not on their own be enough to fix the problem¹.

Why it matters for households

The pots in question are small and no longer being paid into, but they remain invested and charged for. A pot worth under £1,000 held in a scheme charging over 1.1% a year loses value in real terms if returns do not exceed the charge, and the IFS modelling indicates the effect compounds over decades to state pension age¹. The pots most affected are those built up by lower earners and by women, groups the report identifies as most likely to end up with several small deferred pots¹.

Tracking pots down is a separate difficulty. The government's Pension Tracing Service searches a database of over 200,000 pension schemes to find provider contact details, but it requires the name of an employer or provider and does not say what a pension is worth¹. Some providers, including AJ Bell, Standard Life and Aviva, offer free tracing services¹. Defined contribution pots do not automatically form part of an estate and are not covered by a will, so a nomination of beneficiary form is the route by which a provider knows who should receive the money¹.

Consolidating pots is one option covered in the report, but some pensions charge exit fees that could wipe out any saving from switching¹. The IFS proposals on automatic consolidation are recommendations to policymakers, not rules in force.

What happens next

The IFS recommendations on automatic consolidation, a rising threshold and a lifetime provider model have been put forward in its report; no implementation has been reported¹. Pensions dashboards are described as due to launch at some point, with no date given¹.