Effect of DC pension charges laid bare by PPI

In a six-page briefing note from the Pensions Policy Institute, data highlighted how workers who start saving early but have breaks in their career or become deferred members will be particularly hit by defined contribution scheme charges.

In cash terms, a worker who makes annual contributions of £1,200 from 25-50 and then remains a deferred member until they reach state retirement would have a pension pot worth £289,000, as opposed to £399,500, if they paid an AMC of 1 per cent.

In current real earnings terms, that same pension pot would be reduced from £74,000 to £53,500.

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Similarly, a member’s pension pot with a same charge would drop from £435,800 to £338,100 if they saved from 22 until the state pension age with a 15 year break in their career at age 30.

The briefing note stated: “This is because the AMC is levied against the fund accumulated and continues to reduce the value of the fund each year even when the individual is a deferred member and is not making any pension contributions.”

The research also showed how the level of any future charge cap, on which the department for work and pensions consulted earlier this year, could affect pension values significantly.

Should the level be set at 0.5 per cent, currently favoured by the government, DC schemes who charge the maximum amount will result in a pension fund dropping from £701,800 to £610,000, should a member save from 22 to state pension age.

On the other hand, a higher charge cap of 1 per cent would see the value of a pension pot plummet to £532,100.

No pension chargeAMC 0.5%AMC 1%AMC 1.5%
Member who saves into DC scheme from age 22 for 46 years£701,800£610,000£532,100£465,900

Adviser view

Allan Maxwell, director of Glasgow-based Corporate Benefits Consulting, said: “Obviously we want the cost to be as low as is reasonable, but we should also make sure that the investor is getting value for any charges.

“There is anedoctal evidence from final salary schemes that administration service got poorer as charges got cheaper and individuals ended up losing out as a result.”