Pension suppliers will have a cap placed on the fees they can charge for management services from April 2015, Pension Minister Steve Webb has identified.
The cap will be fixed at 0.75%, and is set to benefit millions of workers across the UK who is part of an auto-enrol pension scheme with their incomes.
Nevertheless, the news that the new regulations are set to be implemented a year later than initially expected will be a blow to saving workers at present, with suppliers also disclosing that the knock on effect of the changes is that users may have less choice for their savings in the future.
Auto-enrol employees boosted
Mr Webb pledged that the government would continue their ëfull frontal assaultí on the current complexion of pension management charges, with the scheduled reforms set to be implemented on the same day next year as new regulations for accessing pension funds are.
Chancellor George Osborne announced last Wednesday that he would be changing the pension market away from annuities utilisation, by enabling users to access the full array of their pension pot when they retire, and reducing the tax obligations that they are required to pay on their withdrawals.
The government have forecasted that the cap of management charges will help people enhance their pension pots by over ten thousand pounds throughout their career; with the 0.75% upper limit being substantially lower than the 2%+ that many firms are charging their customers at present.
In particular, those on auto-enrolled contribution pension schemes are set to benefit the most, as they will have larger rewards for their compulsory obligations in the future, and will have a higher amount of flexibility when trying to access these funds later on down the line.
The reduction on the charges that are placed onto these funds will benefit over 185,000 people according to the Office of Fair Trading, who identified that this many people were currently being subjected to charges exceeding 1%.
The government also announced that all sales and payment commissions that are taken from peopleís pension pots will be banned, whilst consultancy charges will also be banned in favour of free and compulsory legal advice.
“We are going to put charges in a vice; and we will tighten the pressure, year-after-year,” Mr Webb said.
The government has been pushing for employees to sign up for a defined contribution scheme since October 1012, and the number of people who have done so has increased massively in recent times.
Defined contribution pension schemes consist of both a worker and their boss placing money into the formers pension fund for each month that they work. Typically, these contributions are reinvested into stocks and shares, and the final pension pot will be shaped by the performance of the investments made with the scheme, meaning that those who hedge their bets on the wrong investment potentially stand to have very little to utilise once they retire.
It is expected that over 9 million people will sign up for one of the schemes in the next half decade, with the government keen to bolster the merits of doing so.
Labour criticised the government for pushing back the dates for the reforms implementation for another year, arguing that it will only damage squeezed households and aspiring savers even more in the upcoming 12 months.
Gregg McClymont, Labour’s shadow pensionís minister, said:
“Savers hit by the cost of living crisis have lost out because the government has repeatedly delayed plans to introduce a cap on rip-off pension fees and charges.
“Today the government has finally admitted that a charge cap is needed but ministers must have the courage of Labour’s convictions and introduce a cap now as they promised.”
However, the delay has also found support in other business circles, who have argued that it is a necessary measure to ensure that the changes are tested properly.
“There is a huge amount for the pensions industry to deal with at present, not least as a result of last week’s Budget announcement, so it is entirely sensible that the government has given the industry some reasonable time to accommodate these changes,” said Tom McPhail, of Hargreaves Lansdowne.
However Neil Carberry, CBI director for employment and skills, questioned whether capping the charges was the right move, arguing:
“We do not think capping fees at this level is wise, especially as schemes will now have to provide expensive advice to every member following last week’s Budget.”
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