Annual charge cap of 0.75% on all workplace pensions set to be introduced from April.
The Government is getting closer to enforcing a default annual charge cap of 0.75% on all workplace pension schemes, which it claims will save average workers thousands of pounds.
The Department for Work and Pensions (DWP) has now laid out draft regulations before Parliament on its proposals to safeguard savers against high and unfair charges.
Subject to Parliamentary approval the default charge cap will come into force from 6th April 2015.
Pensions Minister Steve Webb said the changes would ensure savers would not see their money "disappear in opaque charging structures".
For an average earner currently paying into a fund with an annual charge of 1.5%, the new 0.75% cap will save them up to £100,000 over the course of their working life, according to Government figures.
It’s estimated the reform will divert as much as £200 million from the pension industry to savers over the next decade.
The pension revolution
Workplace pensions (where staff are automatically enrolled into pensions by their employers) was introduced in October 2012 to address the problem of people living longer but not saving enough for retirement. It's being introduced gradually, with the biggest employers first, while small employers still have a couple of years before they need to enrol their staff.
It requires all employers in the UK to enrol eligible workers (aged between 22 and the State Pension age and earning more than £10,000 a year) into a pension scheme, which the employer, employee and the Government contribute to.
Those who don’t want to save have to choose to opt out.
Over five million workers have been automatically enrolled into a workplace pension so far. By 2018 it's expected nine million will either be saving for the first time in a pension or saving more.
Exactly how your pension pot is invested depends on the scheme that your employer signs up to. The Government set up NEST, but there are rivals such as NOW: Pensions and The People’s Pension that employers can go for.
All will offer a default fund as well as alternative funds that have different investment strategies.
The new charge cap applies to the default pension options that workers are placed into when auto-enrolled. The cap will protect them against unwittingly having large chunks of their pots eaten up by high costs.
Savers wanting to take a more hands on approach and choose to be in a pension with more expensive costs won’t benefit from the cap.
Take control of your pension saving with a SIPP
New governance rules for workplace pensions
[SPOTLIGHT]Rules are also being set out by the Financial Conduct Authority (FCA) to help ensure workers get value from the workplace pension schemes they are put in, with the formation of Independent Governance Committees (IGC).
As employers are responsible for making the key pension decisions for their workers, they may lack the capability or the incentive to ensure that members of their schemes receive value for money in the long-term.
From 6th April 2015 firms that operate workplace personal pension schemes will be required to establish an IGC, with at least five members, who will have a clear duty to act independently of the firm and in the interest of scheme members.
Take control of your pension saving with a SIPP
More on pensions:
Pension Tracing Service to triple in size
Having a bigger pension pot means you'll live longer
The final salary pension bombshell that could hurt your investments