Defined Contribution  

Govt to ban flat fees for small pots

Govt to ban flat fees for small pots

The Department for Work and Pensions is to ban the charging of flat fees on pension pots under £100 in an attempt to stop their erosion by charges and administration costs.

The government announced the move today (January 13) following a review but it stopped short of altering the charge cap, which will remain at 0.75 per cent; though transaction costs are not to be included.

The government said members in the qualifying schemes included in its pension charges survey were already below the cap with an average charge of 0.48 per cent.

The government first proposed the ban on flat fees in June 2020 in response to industry concern about the deleterious effects flat fees and admin costs have on small pots.

Their depletion by charges and administrative fees has long been a serious problem for members, who can in some cases see their pensions eroded entirely over the course of their careers, at a cost to the individual of hundreds of pounds of savings.

Pensions minister Guy Opperman said: “Whilst automatic enrolment has been a huge success, some people, particularly those on the lowest incomes, are changing jobs more frequently, with a resulting increase in the number of deferred small pension pots.” 

“I am committed to limiting the erosion of the value of small pots, where flat fee charges risk depleting deferred pots to zero. Nobody should be automatically enrolled, only to find their hard-earned pension savings significantly reduced by charges. 

“Therefore, I will be introducing a minimum level initially set at £100, before a flat fee element of a charging structure can be applied to these pots. I will keep the amount of the minimum level under review with a view to raising it at some stage in the future."

The Pensions Regulator welcomed the move. David Fairs, executive director of regulatory policy, analysis and advice, said: “All defined contribution pension savers deserve to be in a well-run scheme that offers value for members.

“We support the Department of Work and Pensions’ plans to introduce a limit on pension pots below which flat fee charges cannot be levied.

“This proposal will help reduce the erosion of members’ pensions by fees and, along with wider action recommended by the Small Pots Working Group, protect the benefits of savers with small pots."

Industry figures also welcomed the ban but cautioned it was not a long-term solution for all problems.

Steven Cameron, pensions director at Aegon, said: “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.” 

Now Pensions is thought to be one of the master trusts that could be forced into changing its fee structure as a result of the consultation. 

As reported by FTAdviser's sister publication Pensions Expert in June, Now Pensions charges £1.50 a month as an admin fee in addition to a 0.3 per cent annual management charge.