Pensions fees cap proposed by ministers to stop 'rip-off' charges

Government has said people saving into pension schemes could be losing thousands of pounds because of charges

(Flickr (401(K) 2012))

The Government is proposing a cap on all pension charges of 0.75 per cent in a bid to stop people losing thousands of pounds on their pension schemes.

The Office of Fair Trading (OFT) estimates that there are more than 186,000 pension pots with £2.65 billion worth of assets subject to an annual charge of above one per cent.

Small variations in charges can amount to huge differences over an extended period of time to the value of the pension pot someone ends up with.

The Government said a person saving £100 a month over a typical working lifetime of 46 years could lose almost £170,000 from their pension pot with a one per cent charge and over £230,000 with a 1.5 per cent charge.

However, a person holding a pension scheme with an annual charge capped at 0.75 per cent could end up being £100,000 better off than those charged at a rate of 1.5 per cent.

The proposals come as the Government prepares to roll out landmark reforms automatically placing people into workplace pension schemes.

Up to nine million people will eventually be newly saving into a pension or saving more under automatic enrolment, which will increase the amount being saved into workplace pensions by approximately £11 billion per year.

More than 1.7 million people have been placed into pension schemes so far under the reforms, which started last year with bigger firms and a higher-than-expected nine out of 10 people so far are staying in their pension rather than opting out.

Pensions Minister Steve Webb said he remained confident the system will be fairer for anyone automatically enrolled into workplace pensions and will address the long-neglected issue of charges.

He said: "The Government believes that enough is enough on charges. People need to know they are getting value for money when they save into a pension and not being ripped off by excessive charges."

The Government is planning "a full frontal assault on pension scheme charges" he added, highlighting "unacceptable practice" used in the past.

Otto Thoresen, director general of the Association of British Insurers (ABI), said the industry recognises concerns over pension charges, which are at their lowest ever average levels.

He said: “It is important that any cap doesn't have the effect of levelling charges up. The Office of Fair Trading raised a number of concerns about this when deciding not to recommend a cap in its recent study of workplace pensions."

Additional reporting by Press Association