Pension charge limit could backfire for some

The pressure to splash out on Christmas means a bonanza for payday lenders

A proposed limit on the charges paid by members of workplace pension schemes will result in some savers forking out more to their providers, it has been claimed.

Pension firms could be forced to cap management charges at 0.75 per cent or below on the billions of pounds held in workplace schemes, under plans set out this week.

The proposals are aimed at tackling “rip-off” fees and boosting confidence in pensions as the government’s automatic enrolment reforms gather pace a year after they were launched.

Up to ten million people will be saving into a pension for the first time over the coming years under automatic enrolment, where the onus is on employees to opt out if they don’t want to pay some of their salary into a pension.

There are concerns that many of those people could see large chunks of their savings wiped out by charges, particularly where their employer has placed them in a “legacy” pension scheme.

While the average charge on pension schemes launched over the past decade is just 0.51 per cent, many older plans have charges of up to 2.3 per cent a year. Some £2.65 billion in workplace pension savings is held in schemes with annual charges above 1 per cent, the Office of Fair Trading estimates.

The government has set out three options: a cap at 0.75 per cent a year; a 1 per cent limit; or a “comply or explain” system where providers can levy a 1 per cent charge if they can satisfy the Pensions Regulator that they have good reason to do so.

But experts warn that the 0.75 per cent cap isn’t low enough and could encourage firms with charges below that level to increase them.

“A good value for money basic pension plan [without advice] should not cost more than 0.5 per cent a year as an ongoing charge,” said Brian Steeples, managing director at Glasgow-based The Turris Partnership. “The proposed maximum of 0.75 per cent a year is still too high.”

Mark Polson, principal of the lang cat, an Edinburgh-based financial services consultancy, agreed.

“Pension charges for group schemes which don’t include commission – which is all new schemes now – should have no problem fitting inside a 0.75 per cent charge cap. In fact, if you’re asking your employees to stump up more than that for the privilege of a basic retirement savings plan, you’re with the wrong provider.”

Yet there’s a risk of pension providers scaling back their services or even walking away from the market if a charge cap is imposed.

Steeples also warned that some schemes will become even less transparent as pension firms find ways of recouping their lost revenue.

“If there is to be an upper cap on ongoing charges, make sure the scheme does not try to sneak in other charges. The cost should be ‘all inclusive’ and easily understood,” he said.

The same applies if you find you’re in an older pension scheme (set up before 2001) that has legacy charging structures.

The fees on such pension plans can have a “hugely detrimental” effect on the pension pot you end up with, Steeples pointed out.

“If you have an ‘old-style’ pension policy , get it checked out by an independent adviser. The adviser should be able to request all of the necessary information from the scheme provider and confirm what you have got. In many cases you may be able to switch to a cheaper low -cost pension plan.”

There are instances where it’s best to stay put, however, such as where there are annuity guarantees that could now be very valuable.

Meanwhile the government has been told by groups including the National Association of Pension Funds to look more closely at value for money and transparency in pensions.

“Whatever the charge cap, it’s important to remember that pension providers are getting income – maybe even the bulk of their income – from the investments inside the pension rather than the product itself,” said Polson.

“If we were to look at the total hidden charge load – rather than the explicit charges – members bear on insured group pensions, then any fighting over whether 0.75 or 0.5 per cent is more appropriate would look like small potatoes – this ‘total cost of ownership’ is probably where the government should be focusing.”

Payday lenders set to have a merry Christmas

More than a million people will turn to payday loans to fund their spending this Christmas, according to a report warning that the festive season will stretch household finances to breaking point.

A third of UK adults – 16 million people – will pay for Christmas by credit card and 1.2 million intend to use payday loans to cover their costs over the next two months, research by the Money Advice Service (MAS) found.

It revealed that, while the average person expects Christmas to cost less this year – £487, compared with £508 in 2012 – almost four in ten believe it will be more difficult to afford. While 42 per cent of those surveyed said they would cut back on other costs to help fund Christmas spending, more than a quarter admit they would splash out more than they could afford. Seasonal overspending is typically caused by pressure to please other people, wanting to give children the perfect Christmas and being tempted by special deals.

Jane Symonds, head of service delivery at MAS, said: “Christmas is a time to catch up with family and friends but can also be a worry financially, and very stressful if money is tight. Getting to grips with the costs in advance of the big day will help you take control of your spending and alleviate some of the pressure.”

For more information: www.money adviceservice.org.uk/christmasplanner