The Institute for Fiscal Studies (IFS) has urged the Government to take action to stop and reverse the proliferation of small pension pots.

A report from the think tank suggested there is a strong case for deferred small pension pots to be consolidated by default.

The report, produced in partnership with the abrdn Financial Fairness Trust, argued that the current status quo is not fit for purpose, pointing out that, in 2023, there were an “astonishing” 12.1 million defined contribution (DC) pension pots worth under £1,000 that were no longer being contributed to.

It also warned that these numbers have increased rapidly in recent years and will continue to grow further without policy action.

In addition to this, it warned that having savings spread over many small pension pots makes it easier for people to lose track of their savings, and harder to make sensible decisions on how to use their wealth through retirement.

Given this, the report argued that there is a strong case for deferred small pension pots to be consolidated by default, with people being given the option to opt out of this consolidation if they wish.

This, according to the report, would reduce the stock of uneconomical pension pots, and make it easier for people to manage their savings.

Commenting on the findings, IFS research economist and report author, Laurence O’Brien, said: “Automatic enrolment has been a huge success in getting more employees to save in a pension.

“However, without policy action, many will end up with their savings scattered across several small pots by the time they reach retirement.

“This status quo is not fit for purpose: it is uneconomical for pension providers, leading to higher charges for savers, and it makes it harder for individuals to make good decisions on how to use their savings.

“Policymakers should help savers out by ensuring that, by default, their deferred small pots are consolidated together. This would lead to lower average charges and make it easier for individuals to keep track of all their savings.”

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