Flat fees to be banned for small pension pots

18 January 2021

The Department for Work and Pensions (DWP) has confirmed that it will ban the charging of flat fees on any pension pots below £100 to prevent charges and administration costs from eroding them.

The intentions were laid out in the Government’s response to the review of the default fund charge chap and standardised cost disclosure. In addition to this, it was revealed that no changes will be made to the charge cap of 0.75% and that transaction costs will stay separate to this fee. The consultation was initially launched in June 2020 and ran until August 2020. It was published in reaction to concerns raised about the negative impact that flat fees and administrative costs have on small pension pots.

Pensions Expert reported that small pots are believed to present major challenges to master trusts, and pose a threat to the success of auto-enrolment as a whole.

In the foreword to the response, the Pensions Minister, Guy Opperman, wrote:

 “While 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.

Though this set of proposals is designed purely to limit the damage done to members’ savings by flat fees and administration costs, the government’s response noted the “strong support for addressing the wider issue of small-pot proliferation”.

 


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