Government bans flat fees on small pension pots

The Government has banned the use of ‘flat’ fees on pension pots of less than £100.

Related topics:  Later Life
Rozi Jones
13th January 2021
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"The decision to prevent flat fees being charged for the smallest of pension pots created under automatic enrolment makes sense, especially given the large number of small ‘stranded’ pension pots."

The ban will apply to flat annual fees from auto-enrolment pension pots where the fund built up is less than £100.

The Government has also confirmed that the charge cap when investing in the default fund of an automatic enrolment scheme will remain unchanged at 0.75%, having found the market is working competitively.

Steven Cameron, pensions director at Aegon, said: “Automatic enrolment has been a great success, with many millions of additional employees now contributing to a workplace pension. It’s important that we make sure these individuals benefit from every £ they build up. One growing issue is the increasing number of individuals who leave their employer shortly after they’ve been auto enrolled, leaving behind a small ‘frozen’ pension pot, with no ongoing contributions. There are a small number of auto-enrolment schemes which charge a flat fee every month or year and here, there is a risk that very small pots could be gradually wiped out by these fees.

“We share the Government’s desire to make sure that everyone who has been auto-enrolled benefits from the pot they’ve built up, however small that is. Banning flat fees whenever an individual’s fund is under £100 will help. But longer term, it would be far better to find ways of making sure small ‘frozen’ pots left behind when changing jobs are joined up with the individual’s other pensions. Pension dashboards when they are launched in 2023 will allow individuals to see all of their pensions in one place, helping them keep track and ideally encouraging them to consider ‘consolidating’ them. In addition, we support the ongoing work on other ways schemes and providers can join up small pots for the benefit of members.

“We also welcome the confirmation that the overall cap on charges when a member invests in the default fund of an auto-enrolment scheme will be left unchanged at 0.75%. We are pleased the DWP has concluded this market is working effectively. While many schemes charge well below the cap, leaving it unchanged means schemes have a margin to invest in innovation or to add new types of investment into their default funds, with the aim of boosting returns.”

Tim Box, senior research consultant at LCP, added: “The decision to prevent flat fees being charged for the smallest of pension pots created under automatic enrolment makes sense, especially given the large number of small ‘stranded’ pension pots. The recent DWP Small Pots Working Group report found that 25% of deferred pots in a survey of five of the largest DC pension providers are less than £100 this decision will benefit literally millions of pension savers. However, over time a better solution would be to make sure that very small pots get consolidated into larger pots, and DWP needs to drive forward in this area.

“We also believe it is sensible to keep the charge cap at the existing level of 0.75%. The Pension Charges Survey 2020 shows the average charge across all members of qualifying schemes is 0.48% - significantly below the current charge cap. This shows that providers have been working hard to reduce costs for commercial reasons but keeping the cap at 0.75% retains scope for providers to offer innovative investment solutions (such as in illiquid assets) which may cost more but are likely to deliver better member outcomes in the long-term.

“Finally, we are relieved that transaction costs are not to be included within the charge cap at this time. This is a pragmatic decision that will avoid additional complication in the charge cap calculations."

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