Government considers pension fee cap
Steve Webb, the Pensions Minister, has recently said that the government will start a 'full frontal assault' against pension fees. The government is looking into capping the management fees which pension providers charge. The proposed cap is between 0.75% and 1% of a person's pension pot.
The government gives the example of a person paying £100 a month into their pension pot over their working career of 46 years. The effect of charges would reduce their pension pot by the following:
- Around £170,000 if the annual charge was 1%; or
- Around £230,000 if the annual charge was 1.5%.
Higher charges are often found with older schemes and can be as high as 2 to 3%, whereas the average charge for schemes set up in 2012 was 0.51%. However, Mr Webb said that the cap should not be set lower than 0.75% so that providers do not pull out of the market, which would reduce competition.
The government intends to issue a consultation paper to get the industry's opinion on its proposals. Three suggestions have been put forward:
- A cap of 1%;
- A cap of 0.75%;
- A two tier 'comply or explain' cap. The cap would be set at 0.75%, but the pension providers could charge up to 1% if they can explain why they need to do this to the Pensions Regulator.
However, any cap which is decided upon after the consultation process has finished will only apply to automatic enrolment pension pots.
Steve Webb has said that the government is also thinking about banning 'active member discounts'. 'Active member discount' means that a pension member pays a lower annual management charge while they are paying into the scheme, and a higher charge if they leave the scheme.
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