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DC Pension Charges

In April 2015 a 0.75% cap on charges was introduced for the default funds of all DC auto enrolment qualifying schemes. 

The definition of default fund for this purpose includes scenarios where members had a choice where to invest their funds, but more than 80% of members chose to use the same fund – which could be the case in AVC arrangements where the choices were limited.

The Government estimates that over the next 10 years an extra £195 million of pension contributions will turn into pension savings, rather than being swallowed up by unnecessary costs and charges.

An individual earning £20,000 would save an additional £35,500 over their lifetime if they saved in a scheme with a 0.75% charge compared to a 1% charge.

The government has also set out equivalent caps for schemes with combination charge structures.

Three different categories of pension charge will be banned altogether:

  • payments for sales commission which are deducted from members’ pensions
  • charge hikes when people are no longer employed by a company but leave money in the company’s pension scheme
  • ‘consultancy charges’ where members have to pay for advice given to their employer

In addition there will be tough new rules to make sure that all of the hidden ‘transaction’ costs in pension schemes are published, and the government will then consider whether these should also be included in the new charge cap.

An independent audit of pre-2001 and high-charging pension schemes is due to complete by the end of 2014 and the government will consider whether further action to protect scheme members is necessary following that review.