Pension charges cap plan welcomed in crackdown on rip-off fees
Government plans to impose a cap on pension charges as part of a crackdown on "rip off" fees which can shrink the size of someone's retirement pot by thousands of pounds have been welcomed by employers and consumer campaigners.
A consultation proposes to ban providers from setting their charge for managing a pension pot above 0.75% a year amid fears that savers are at risk of being placed in poor value schemes as landmark reforms to encourage workers to start putting money towards their retirement roll out.
The Government proposes specifying a "broad definition" of charges, to prevent providers from hiding their fees outside any cap.
It said it wants to stamp out any bad practice which could "undermine trust in the system". The Government is also considering halting a practice known as "active member discounts", whereby people who have stopped paying into a pension, perhaps because they have changed jobs, see the charges for running their pot go up.
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The Office of Fair Trading (OFT) recently found that pension savers typically see their annual charge hiked by around half a percentage point under this system.
Even adding a fraction of a percentage point to an annual charge can wipe tens of thousands of pounds off the eventual size of the pension someone will end up with.
The Government said that someone who saves £100 a month over a typical working lifetime of 46 years could lose almost £170,000 from their pension pot with a 1% charge and over £230,000 with a 1.5% charge. A pension saver with a 0.75% annual charge on their pension pot could eventually end up £100,000 better off than if they had been charged a rate of 1.5%, the Government said.
Other options for caps being considered by the Government include a higher charge cap of 1% and a "two-tier" cap. The two-tier cap would involve a standard cap of 0.75% and a higher cap of 1% if employers explain to the Pensions Regulator why their scheme charges more than 0.75%.