Pension charges to be capped at 0.75%

Management charges on pensions will be subject to a capped limit of 0.75% per annum from April 2015, says the government.

Pension charges to be capped at 0.75%

The cap will be significant for millions of people who are being automatically enrolled into workplace pension savings.

The charge cap is the toughest of the three the government had been considering with other options being a 1% cap or a looser “comply or explain” rule, which would have allowed schemes to charge higher fees if they could justify them.

In addition there will be tough new rules to make sure that all of the hidden ‘transaction’ costs in pension schemes are published and the government will then consider whether these should also be included in the new charge cap.

However, the cap will apply to all defined contribution pension schemes used for auto-enrolment but will not yet apply to “legacy schemes” outside the auto-enrolment scheme.

Consumer groups have long said the charges and fees levied on pension funds by life companies have “too much in return for too little”.

High charges erode the value of a pension pot. The government estimates that, over the next 10 years, an extra £195million of pension contributions will turn into pension savings rather than being swallowed up by unnecessary costs and charges.

According to figures from the Department for Work and Pension , an individual earning £20,000 would save around £35,500 over their lifetime if they saved in a scheme with a 0.75% charge compared to a 1% charge.

Some older schemes set up more than a decade ago have been found to charge up to 2.3% a year in management fees.

Pensions minister Steve Webb said: “Through the new measures, this government will be the first to get an iron grip on pension charges.

“We are going to put charges in a vice and we will tighten the pressure, year-after-year. In the next 10 years, the new charge cap will transfer £200million from the profits of the pensions industry to the pockets of savers.”

However, Phil Loney, group CEO of Royal London, said: “This is a lacklustre policy announcement. It is disappointing that, in the wake of the Chancellor’s inspirational reforms to the ‘at retirement’ market dropping the need to buy annuity, that today we are back to the same old price-capping policy options.

“A price cap will do very little to improve competition in the workplace pensions market. It will fix the charges that members pay at the level of the cap.

“The promise to review the level of the cap in 2017 means charges could reduce further in future but they will not reduce at the rate that would be seen if the market was truly competitive and open to active switching.”

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