Major pensions reform becomes law - here are five ways it affects your retirement

A landmark piece of legislation designed to make pensions simpler and easier has become law. 

Under the Pensions Schemes Act 2026, several changes will be made to how the pension industry works and the services available to customers.

The government says it could all add up to an extra £29,000 for the average pension pot and benefit more than 20 million workers.

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Here are five of the key changes and how they will affect you...

1. Small pots consolidation

Many workers have small pension pots they've built up at different workplaces.

When you leave a job, you and your employer stop contributing to that workplace pension, but the amount you have built up continues to be invested. These are called deferred pension pots.

These pots do not automatically follow you to your next role, meaning some people forget about them.

To tackle this problem, deferred pension pots worth £1,000 or less will be automatically moved and merged into a single, larger pot under the act.

This larger pot will be managed by a certified consolidator.

The pot's owner will be contacted about the move and will be able to choose whether they would like to opt out and transfer the funds elsewhere or continue.

Maike Currie, vice president of personal finance at PensionBee, told Sky News that around 4.8 million pots were sitting lost in the UK, with nearly one in 10 workers believing they've lost a pot worth more than £10,000.

"Automatically consolidating pots under £1,000 should reunite workers with forgotten savings and cut the charges that quietly erode small balances," she said.

But she warned the catch was timing, as the duty isn't expected to apply fully until around 2030.

"Well ahead of that, the pensions dashboard should be live, giving consumers a view of their retirement savings in one place - this information will help them to more easily consolidate with a provider of their choosing," she added.

2. Pension 'megafunds'

One of the most controversial changes under the new legislation has come from the creation of pension "megafunds".

Smaller multi-employer pension schemes will be added to larger funds made up of assets from local government pension scheme authorities. These are specific councils responsible for administering pension funds for local government employees.

The government says this will allow the smaller funds to invest in a wider range of assets, including UK businesses and infrastructure, and will reduce costs.

The government now has a "reserve power" to tell these funds where to invest up to 10% of their money, but no more than 5% can be forced into UK-based investments.

Ms Currie said the scale could deliver real benefits if it did translate into lower fees, broader investments and better service. But she warned bigger wasn't automatically better.

"The test is whether those efficiencies are passed back to savers and whether smaller, innovative providers can still compete to keep standards high," she said.

Industry experts have raised concerns this could put savers' funds at higher risk.

"There is a clear danger that conflating government policy goals - namely driving higher levels of investment in the UK and ultimately economic growth - with those of savers and retirees means the latter will be risked in pursuit of the former," said Tom Selby, director of public policy at AJ Bell.

"It is vital the needs of pension scheme members remain the priority, rather than the needs of a government focused primarily on its growth agenda," he added.

3. An easier way to judge your pension scheme

One of the most popular pension schemes is a defined contribution pension.

It is usually used by employers to build up a pot of money to pay you a retirement income. They will ask you to contribute a set percentage of your salary into the pot, and they'll top it up.

Typically, workers pay 5% of their earnings, and employers add at least 3%. If you've set the scheme up, you make the contributions yourself.

In both cases, the pension provider will invest your money, so it should grow over time. Unless you want to choose your own investments, your provider will usually put your money in a default investment fund. This typically uses riskier investments when you're younger and lower-risk investments as you get closer to retirement age, potentially making it complicated to manage and review your pension's performance.

Ms Currie said the difference between a poor and strong-performing pension could be more than £500,000 by retirement.

Under the new legislation, there will be a standardised "value for money" framework used to assess how well each scheme is performing.

Trustees and managers will have to report on the scheme's value for money based on investment performances, costs and charges and service quality.

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Schemes will be given a rating based on their performance, with regulators allowed to intervene and make information about their shortcomings public.

Schemes will also be able to compare themselves to their competitors in a move the government says will drive competition across the sector.

Ms Currie said this will allow people to assess whether their pensions are "genuinely working for them" - but warned there is a risk it could lead to "complexity, subjectivity and potentially misleading signals" for consumers, too.

4. Legal duty for retirement advice

Each defined contribution pension scheme has trustees who are responsible for making sure it is managed in the best interest of its members.

They are now legally required to design, offer and review one or more default retirement options for savers.

They have to provide clear and timely communications to members, explaining all their options to turn their pension pot into a regular income when they retire.

"Many workers reach 55 with no plan and risk either drawing down their pension pot too quickly or being overly cautious," Ms Currie said.

"This change should mean less guesswork and more confidence that the money will last."

5. Overpayment disputes

From 29 June, the pensions ombudsman will have new powers in cases involving pension overpayments.

This removes the need for trustees to apply to the courts to enforce repayment, reducing legal costs and administrative delays.

Consumer champion Which? explained that previously, if a pension scheme accidentally overpaid a member and there was a disagreement on this, the pension scheme would need to go to court to get a special order before it could take the money back from the member's future payments.

Under the changes, the ombudsman's decision will be enough to let the scheme start recovering the money.

Ms Currie said this would give savers caught up in overpayment disputes a "faster and cheaper route" to a resolution.

(c) Sky News 2026: Major pensions reform becomes law - here are five ways it affects your retirement