If you set up your personal pension some years ago, there’s a good chance you’re overpaying for it. Consumer groups have long argued that many plans are too expensive, and the Financial Conduct Authority (FCA) has now announced an investigation of the non-workplace pensions market.
In practice, that means any individual pension set up separately from your employer. Most recently, self-invested personal pensions (Sipps) have been the most popular individual arrangements, but the investigation will also cover traditional personal pensions, stakeholder pensions and a variety of other schemes going back more than 30 years.
In some cases, personal pensions are highly competitive. Sipp providers in particular have been caught up in a price war since the pensions freedom reforms of 2015.
However, other personal pensions carry much higher charges, often levied through different types of fee that make it difficult to work out the total cost. Savers who took out such pensions some time ago are particularly likely to be paying over the odds, especially those who began investing in the 1980s and 1990s, before the government introduced stakeholder pensions, which capped charges at maximum levels.
In some cases, these pensions are now gathering dust, with savers investing for retirement via new vehicles; even so, the charges are still deducted, eating into whatever investment growth the pension fund is achieving.
Defining what constitutes a high charge isn’t straightforward. Savers whose personal pension investments go beyond the most traditional options – basic equity and bond funds – will typically have to pay higher charges for the privilege. You may also have to pay extra fees for particular product features.
In the workplace-pension sector, an FCA investigation into charges resulted in the introduction of a cap of 0.75% a year. This only applies to the default pension funds offered under a workplace scheme – providers may charge higher fees for more specialist investments – but it gives some idea of what regulators believe is appropriate.
Stakeholder pensions, introduced in 2001, are not allowed to charge more than 1.5% a year for the first ten years. Thereafter, charges are capped at a maximum of 1% a year. If competition is failing, similar rules may be needed again.
Regulator slams gate closed after horse bolts
The regulator set up to protect members of final-salary pension schemes whose employers get into financial difficulties is too slow to act, argue MPs. The House of Commons’ Work and Pensions and Business, Energy and Industrial Strategy (BEIS) committees have demanded an explanation from the Pensions Regulator after it emerged that the watchdog had been talking to the ill-fated Carillion about its pension scheme for almost a decade.
Despite the discussions, the scheme had a deficit of close to £600m when the company collapsed. Rachel Reeves (pictured), chair of the BEIS committee, complained about “regulators who monitor rather than act, who are adept at closing the gate after the horse has bolted”.
The row highlights the difficult situation in which the regulator often finds itself. Where it knows a pension scheme is substantially short of the assets required to meet the pension promises made to staff, it has powers to intervene to order the sponsoring employer to take action. However, doing so may exacerbate the financial difficulties of the employer, potentially undermining its ability to remain solvent and continue sponsoring the scheme over the long term.
The Carillion case follows recriminations over the deficit in the pension scheme at bankrupt retailer British Home Stores (BHS). The regulator has told former BHS boss Dominic Chappell that he must pay around £10m into the BHS scheme. The fund has already received a £363m injection from Philip Green, who sold BHS in 2015 to Chappell’s consortium.
Tax tip of the week
If you find your tax return stressful, rejoice, says consumer group Which. HMRC is rolling out a simplified system for certain taxpayers. Existing state pensioners who submit a tax return because their state pension is worth more than the annual personal allowance will be switched to the Simply Assessment system for the 2017/2018 tax year. Those who are eligible will receive a letter from HMRC setting out their income, and can then either pay their tax bill or tell HMRC if anything is incorrect or missing.