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Ban on flat fees for small pensions

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25/05/2021
Flat fees which are charged on small pension pots, eroding their value, are to be banned.

The Department for Work & Pensions (DWP) has proposed introducing a threshold of £100, with pension providers banned from charging flat fees on pots worth up to this point, ensuring that the value of those pots is not whittled away to nothing over time.

The department warned that this is a situation commonly faced by people who change jobs frequently or who take up short-term contracts, which means they are regularly signed up to new workplace pension schemes.

The workplace pension scheme requires employers to open a pension on behalf of staff, and contribute towards it, while those contributions are further topped up by tax relief from the government.

Helping short-term workers

Guy Opperman, the minister for pensions, pointed to the success of the automatic enrolment scheme, with more than 10 million employees paying into a pension scheme through their employer since 2012.

He added: “But for some, particularly those who regularly take on short-term work and change jobs frequently, there is a greater chance that they will be automatically enrolled into new workplace pensions a number of times, building up a collection of small pots. It is this group we want to help by changing the way fees work.”

The consultation run by the DWP is also looking at ways to improve savers’ understanding of the charges they pay for their pension products, to make it easier for them to compare different products.

The proposals come off the back of suggestions from the DWP of ways to make pension statements easier to understand by condensing them down into just two pages

However, the government has still not outlined plans to deal with the ‘net pay’ anomaly which is resulting in low earners missing out on tax relief on their pension contributions.

Opening up choice

Tom Selby, senior analyst at AJ Bell, said that by banning flat fees on such small pots, the government was not only protecting people’s pensions but also the reputation of the workplace pension scheme itself.

Selby added that allowing employees to choose their own pension provider while keeping contributions from their employer was worth considering.

He continued: “This would potentially open up greater choice to automatic enrolment savers, who at the moment are often offered a ‘like it or lump it’ single workplace pension option. If employees could choose their provider and keep their employer contribution, this could increase engagement and place greater competitive pressure on the market.”

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