The government will introduce a 0.75% charge cap on auto-enrolment pension schemes from 2015.
The cap will be introduced for the default funds on all qualifying schemes from April 2015, with the cap reviewed in 2017.
Pensions minister Steve Webb (pictured) described the measures as 'tough' and said they will ensure pensions schemes deliver value for money for savers.
A statement from the Department for Work & Pensions (DWP) said the new rules would end 'rip-off' charges and ban hidden costs to help people build the best possible retirement income pots from their savings.
The DWP has also banned three different categories of pension charges:
* Payments of sales commission which are deducted from members' pensions;
* Charge hikes when people are no longer employed by a company but leave money in a company's pension scheme;
* 'Consultancy charges' where members have to pay for advice given to their employer.
On top of this, the DWP said new rules would be brought in to make sure hidden 'transaction' costs in pension schemes are published to determine whether the should be included in the new charge cap.
The government believes that over 10 years the new measures will see an extra £195 milllion added to pension contributions rather than swallowed up by unnecessary charges.
It estimates an individual earning £20,000 would save around £35,500 over their lifetime if they saved in a scheme with a 0.75% versus a 1% charge.
'Through the new measures, this government will be the first to get an iron grip on pension charges. We are going to put charges in a vice; and we will tighten the pressure, year-after-year,' Webb said.
'Over the next 10 years, the new charge cap will transfer £200 million from the profits of the pensions industry to the pockets of savers. Pension savers have paid too much, for too long. It is time to put the saver first.'
The Investment Management Association (IMA) is not convinced that the introduction of the cap is the best way to police the auto-enrolment schemes, highlighting a lot more work needs to be done on corporate governance.
IMA director of public policy Jonathan Lipkin said in a statement: 'While there is understandable concern in government about assuring DC scheme quality, a charge cap is not the best way to achieve good outcomes and this was a key finding of the 2013 Office of Fair Trading (OFT) market study.
'Instead, the main focus should be on improving governance structures and standards across the DC environment.'
He added: 'The IMA remains committed to working with government and regulators to facilitate better governance as well as improved consistency and transparency of charges and costs disclosure. Such consistency and transparency is essential for building public trust in the pensions system.
'The government has correctly recognised that charges and transaction costs should not be bundled together in a cap, again a clear conclusion of the OFT. Such an approach would have been counter-intuitive and counter-productive, unduly complicating the default design process and artificially constraining scheme decision-makers.'
Royal London was more scathing of the measures, describing them as 'lacklustre'.
'It is disappointing that in the wake of the chancellor’s inspirational reforms to the "at retirement” market, dropping of the need to buy annuity, that today we are back to the same old price-capping policy options.' Royal London chief executive Phil Loney said in a statement.
'A price cap will do very little to improve competition in the workplace pensions market. It will fix the charges that members pay at the level of the cap.
'The promise to review the level of the cap in 2017 means charges could reduce further in future but they will not reduce at the rate that would be seen if the market was truly competitive and open to active switching.'
National Employment Savings Trust (Nest), an independently-run pension scheme backed by the government, was more complimentary.
'We welcome the government’s focus today on ensuring high quality, well governed and low cost pensions are available to all,' Nest chief executive Tim Jones said.
'These arrangements will provide welcome clarity for consumers and employers on what good value means, and in helping them to compare schemes.
'We also welcome the moves to provide greater transparency on the other charges made by pension schemes, particularly in relation to investment, as these can often eat into a member’s pot.'