Boost for 1.2 million pension savers as flat rate fees are scrapped

MORE than one million savers are set for a pension boost after the government confirmed it will scrap flat fees.

Small pension pots of less than £100 will no longer be charged in a way that could eat away at their cash and leave them with nothing by retirement.

Savers will loose less many on fees for small pension potsCredit: Getty – Contributor

The change is set to affect 1.2million people who pay into a workplace pension through auto-enrolment, the government estimates.

More than 10 million people in total now pay into a pension automatically through work.

But many have only a small amount saved, especially among low earners.

People are also collecting more pension pots with smaller amounts saved, because switching jobs and contract work is more common than it used to be.

How your small pension can be eaten up by flat fees

Bhumika Meyangbo, 32, told The Sun she was “shocked”to learn that one of her pension pots worth around £100 was being stung with a £18 charge every year.

The software tester, who lives in Ashford in Kent, contributed a total of £106 between August 2013 and April 2014 together with her employer.

When she consolidated her pensions last year, she discovered this pot had dropped in value by 7% over six years.

It came after she’d paid an estimated £46 in fees just for the administration of her savings — about 43% of her contributions.

She added: “The fee was shocking to me and if I had ignored few more years, my pension would have just eroded away completely as it was only around £99.”

Pension providers are allowed to charge a flat fee regardless of how much is saved.

The average fees charged by providers range from £13 to £20 per year, according to government figures.

The government has now said it will ban this flat fee charge and that it will bring in the new rules by April 2022.

Pensions minister Guy Opperman said: “We all know what a success automatic enrolment has been in getting more people saving into private pensions – with over 10 million employees paying into a workplace pension since 2012.

“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.”

Plans for a shake up of fees were first announced in January this year.

What is pensions auto-enrolment?

HERE’s what you need to know about pensions auto-enrolment:

What is pension auto-enrolment?

Since October 2012, employers have had to enrol their staff into workplace pension schemes as part of a government initiative to get people to save more for retirement.

When does auto-enrolment apply?

You will be automatically enrolled into your work’s pension scheme if you meet the following criteria:

You aren’t already in a qualifying workplace scheme.
You are aged at least 22.
You are below state pension age.
You earn more than £10,000 a year
You work in the UK.

How much do I contribute?

There are minimum contributions that you and your employer must pay.

Your minimum contribution applies to anything you earn over £6,136 up to a limit of £50,000 (in the tax year 2019/20). This includes overtime and bonus payments.

A minimum of 8% must be paid into the pension, with you contributing 5% and your employer paying at least 3%.

What if I have more than one job?

For people with more than one job, each job is treated separately for automatic enrolment purposes.

Each of your employers will check whether you’re eligible to join their pension scheme. If you are, then you’ll be automatically enrolled in that employer’s workplace pension scheme.

Can I opt out?

You can choose to opt out, but you’ll miss out on the contributions from the government and from your employer. If you do choose to opt out you can opt back in later.

Following a consultation with the pensions industry the plans will go ahead and apply to pension pots of £100 or less.

Charges will still apply but they will be much cheaper. A fee that’s a percentage of the pension pot can be charged annually but this is capped at 0.75%.

Becky O’Connor, head of pensions and savings at Interactive Investor said: “The ban on flat fees on pots worth £100 or less means people with very small pots, perhaps left behind from old jobs, can take some comfort that they won’t disappear completely.

“Those whose pensions come with percentage charges don’t need to worry – these will not be eroded in the same way.

“But if you lose track of a small value pension that has a flat fee, it can still suffer major erosion over the years even with this ban in place.”

Ms O’Connor recommends keeping on top of all your old pensions and the types of charges that apply, as well as keeping your address up to date with pension providers.

She said: “Keeping track of old pensions can be hard work as people can have so many jobs through working life, but the possibility of your pot becoming next to worthless through charges if you forget about it should spur us all into keeping tabs

Consolidating old pensions pots in one place can also make it easier to keep track she said.

“The moral of the story is don’t forget about old pensions – even with the ban in place. And find out what you are paying for them and whether you’d be better off moving them somewhere cheaper.”

Top tips to boost your pension pot

DON’T know where to start? Here are some tips from financial provider Aviva on how to get going.

Understand where you start: Before you consider your plans for tomorrow, you’ll need to understand where you stand today. Look into your current pension savings and research when you’ll be eligible for the state pension, and how much support you’ll receive.
Take advantage of your workplace pension: All employers are legally required to provide a workplace pension. If you save, your employer will usually have to contribute too.
Take advantage of online planning tools: Financial providers Aviva and Royal London have tools that give you an idea of what your retirement income will be based on how much you’re saving.
Find out if your workplace offers advice: Many employers offer sessions with financial advisers to help you plan for your future retirement.

The government is also looking at simplifying the way savers are charged on workplace pensions of any amount.

Different pension providers charge in different ways making it difficult for people to understand the cost or compare different pension products.

A separate shake up could see charges applied in a standard way.

Currently pension providers can charge in three ways:

a single percentage charge, capped at 0.75% of funds under management annually
a combination of a percentage charge on each contribution plus an annual percentage charge of funds under management
a combination of an annual flat fee plus an annual percentage of funds under management charge

The government said this could be “acting as a barrier” to savers “better understanding and ability to compare the costs of their pension with other pension products and schemes.”

A ban on this combined charging structure would affect 17million pension pots.

For those with a smaller pot of money saved in their pension, they could pay lower fees, but those with larger pots could pay more.