State pension: Expert discusses possible ‘significant increase’
Ministers are to unveil plans for banning annual flat fees on all auto-enrolment pensions pots worth £100 or less. The measure is designed to help employees who frequently change jobs and have their pensions divided among a string of different workplace pension schemes as a result. Many see their savings gradually eroded over the years as a result of annual, flat fees on relatively small amounts of cash.
Low-income earners in particular are being left with diminishing retirement savings as a result of the problem.
Research suggests that £100 saved in a workplace scheme by an employee aged 22 could be entirely wiped out by fees during their employment career.
Pensions Minister Guy Opperman is due to announce the change today.
He told the Daily Express: “Protecting savers and giving them value for their money is my priority.
“No-one should find their hard-earned pension savings eaten away by charges.
“Removing flat fees on pension pots worth less than £100 will boost the pensions of hundreds of thousands of people and help them enjoy the retirement they deserve.
“We will also be introducing pensions dashboards, which will make it easier for savers to track these smaller pension pots and ensure they’re getting the most from their savings.”
State pension changes to give hundreds of thousands huge boost in retirement savings
Automatic enrolment in workplace pension schemes was introduced in 2008 following concerns that too many people were reaching retirement without having saved enough money to support themselves in old age.
The measure massively widened workplace pension saving, particularly helping younger workers and those on low incomes to start saving for their later years.
Around 10 million employees are now estimated to be enrolled in a workplace pension scheme as a result of the policy.
Department of Work and Pensions officials estimate that an extra £22.7billion a year is being saved in workplace pension schemes compared with 2012 as a result of auto-enrolment.
But some workers who frequently are acquiring a large number of small pension pots.
The new curb on flat, annual fees is designed to enhance financial protections for all workers automatically enrolled in schemes.
Ministers are committed to regular reviews of the policy and expect the initial £100 limit to be raised in the long term.
Details of the measure will be set out in a document published following a “Default Fund Charge Cap and Standardised Cost Disclosure” review by the Department for Work and Pensions.
The changes are expected to come into force later this year after being proposed by a pensions industry working group set up by the department.
A report from the working group published last month said: “The growth in the number of small, deferred pension pots is not in the interests of pension scheme members, pension providers or the taxpayer.
“It brings potential cost consequences for all parties and without action the situation will likely prove to be unsustainable.
“However, the most significant impact is that scheme members will not experience the best possible outcomes from their workplace pension savings.”
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A typical example highlighted in the report showed that a £100 pension pot, deferred by a 22-year-old employee and with an annual flat-fee charge of £20 on top of a 0.25% annual management charge, would be eroded to zero well before the worker reaches the retirement age of 68.
A pot of £500, deferred at age 22 would be worth around £100 by the age 68 under the same charging structure.
Research by the working group also found most employees with pension savings scattered across several small pots were unaware of the risk to their cash posed by fees.
“The surveys broadly indicated relatively low levels of reported understanding of the member risks around small, deferred pot ownership and subsequently only limited concern around these.
“This is striking given the likely higher levels of engagement within this particular survey population.
“Across all of the surveys, a majority of respondents (ranging from 53% to 80%) reported knowing very little or nothing about the possible risks of owning one or more inactive pension.”
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DWP officials are also starting work on standardising pension costs and charges to make it easier for investors to compare different schemes.
Baroness Altmann, a former pensions minister and leading expert on the pensions industry, said: “This is a step in the right direction, but the Government should be looking to encourage people to have one pension pot that they take with them throughout their entire working lives.
“Hundreds of thousands of people have pension pots with small amounts in them who will see their savings slowly eaten away over time.
“There are so many small pots the pensions industry can barely keep track of them.
“This was a foreseeable problem when the auto-enrolment system was set up and the Government needs to address it.”
Baroness Altmann suggested the National Employment Savings Trust (NEST), a workplace pension scheme set up by the Government, could be better used to provide single career long pensions and avoid the problem of employees saving small sums in separate retirement pots.
Real change is coming to help protect your pension savings
By Guy Opperman, Minister for Pensions
Over 10 million British citizens have been automatically enrolled by their employer into a private pension in which they save at least 8% of earnings.
This is great news for savers, but it also means many people have multiple small pots of pension savings which are being eaten up by costs and charges. Until now.
I am introducing a minimum level, initially set at £100, before flat fee charges can be applied to small pension pots – protecting them from being eroded over time.
These pots are typically created by someone who works multiple jobs over their working lives, but they’re often left untouched – or “deferred” – for many years.
Nobody should arrive at retirement only to find their hard-earned pension savings diminished.
I am also starting work on standardising costs and charges so that true price comparison can be made and a real assessment of the value for money invested can be calculated.
At present, price comparison of the costs of automatic enrolled pensions is not possible – and this needs changing.
Together, these measures place the interests of the saver front and centre.