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Q&A: pension charges explained
Labour leader Ed Miliband has attacked pension charges for being too high, but what exactly are you paying for?
by Michelle McGagh on Jul 24, 2012 at 09:30
From October people who are not currently part of a workplace pension will be auto-enrolled in to one, and if the company does not have one then they have to start one. Many companies which don’t currently run employee pensions are expected to adopt Nest as their scheme.
Nest members will pay a 1.8% charge on the value of each contribution to cover Nest start-up costs; if you paid in £100 a month, £1.80 of that would go to Nest. An annual management charge of 0.3% of the pension fund will also be levied.
Nest has said it will adopt a passive investment strategy, which means money will not be actively managed by a fund manager but will be invested to track certain stockmarkets, keeping the costs low.
What can the government do about high charges?
With the creation of legislation that governs Nest, the government was given powers to cap pension charges for all pensions. However, it is keeping this card in its back pocket, and has told the pensions industry to sort out the problem itself.
The National Association of Pension Funds is already working on a code of conduct to ensure that charges on defined contribution pensions are clearly and accurately stated to help employers pick the right pension scheme for their employees. The code is currently being consulted on and is expected to be launched in the summer.
The Association of British Insurers, which has accused Miliband of ‘scaremongering’ over pension charges, has also said it will help instil fair costs into pensions by examining the use of exit charges. However, it maintains that exit charges are a hangover from older, more expensive pension schemes, and are rarer nowadays.
Pensions minister Steve Webb has fired a warning shot at pension providers, telling them to review their 'back book' of pensions and bring down high charges and scrap exit fees, which take a big chunk out of your pot if you try and leave the scheme, meaning people are 'locked in' to expensive pension schemes.
There is particular concern from the government about the high charges on default funds - into which your pension money is automatically invested if you do not make an active choice about investment.
Webb has urged pension providers to 'look again' at older pension contracts. Writing in the Daily Telegraph, he said: 'They should ask themselves how many policyholders they have who have pensions on term that they would not dream of offering to new customers.
'And they should ask themselves if the battered reputation of their industry would not be greatly enhanced if they were to revisit these schemes and offer scheme members fairer terms.'
Although Webb said the government does have the power to cap pension charges, implementation is more difficult as what charges are included in the cap need to be determined, and there is a concern that low cost pensions scale their charges up to the cap.
'I remain determined to make sure that every pound that [savers] put aside is turned into the maximum possible amount of pension,' Webb said. 'And if further measures are needed to clamp down on charges, then we will not hesitate to take them.'
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