In his Autumn Budget, the chancellor announced that the government will consult on changes to the current 0.75% pensions charge cap.
Rishi Sunak claims changes would lead to ‘higher return investments’, though the move has raised concerns that pension savers will face higher fees. Let’s take a look at what it all means.
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What is the pensions charge cap?
Before we dive into the Autumn Budget announcement, let’s touch on what the pensions charge cap actually is.
The pensions charge cap is the maximum limit that providers can charge pension savers who are auto-enrolled into defined contribution workplace pensions. The current cap is 0.75%.
Many workers are enrolled in auto-enrolment pensions, which require monthly contributions from both the employee and employer. Under current rules, employers must contribute at least 3%, while workers must contribute a minimum of 5%. However, some employers go further than this, and will match their employee’s monthly contribution up to a limit. Any payments are taken from gross pay and, as a result, auto-enrolment pensions provide a tax-efficient way of saving for the future.
The pensions charge cap was introduced in 2015 in order to protect pension savers with auto-enrolment pensions from high fees. The cap applies to all administration and investment charges, though it excludes transaction costs. This means it doesn’t cover any costs incurred by investment managers overseeing your pension.
Budget 2021: What’s happening with the pensions charge cap?
In the Budget, the government said it will consult on making changes to the existing 0.75% pensions charge cap. The chancellor said the changes would help unlock ‘institutional investment while protecting savers’.
Analysts claim that any increase in the cap could help direct billions of pounds of pension fund cash into infrastructure schemes, including green energy projects and homegrown tech firms. Such a move would also align with the government’s wider ‘levelling-up’ ambitions, as increased investment in these sectors will likely support jobs throughout the country.
Currently, the majority of investments involved in these types of projects come from private equity and venture capital firms rather than pensions, due to the current fee cap. As a result, more investment should go to these sectors if the cap is increased as suggested in the budget.
What will the budget announcement mean for pension savers?
Many in favour of a cap increase will claim that investing in progressive sectors could lead to higher returns. This is undoubtedly the chancellor’s aim. Supporters of increasing the cap may also point to the fact that current pension charges average 0.4%. This is far less than the current cap.
Despite this, some have flagged concerns that increasing the cap will lead to higher costs. According to Andrew Warwick-Thompson, former executive director at The Pensions Regulator, careful thought needs to be given to any changes.
He explains “The cap was introduced on strong evidence that savers needed protection from some undoubtedly egregious charging structures. Careful thought needs to be given to any proposal which undermines the consumer protection principle that lies behind the cap.”
Consumer champion Martin Lewis also raised concerns that any changes to the cap could have negative consequences. Following the budget announcement, he warned that pension providers “must not be allowed to push up the norm for charges for simple funds”.
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When will any changes to the pensions charge cap take place?
The Autumn Budget did not give an indication as to when the pensions charge cap would be consulted on.
The government last completed a review on the pensions charge cap in January, when it was decided that no changes would be made.
Keen to learn more about the Autumn Budget? See our articles on announcements concerning inflation, Air Passenger Duty, Universal Credit and alcohol duty.
