Guidance on charge controls and the flat fee threshold on active and deferred pots.
Published: July 2016
Last updated: March 2024
28 March 2024
Costs and charges guidance separated from the value for DC scheme members guidance. Information removed on the adjustment measure, active member discounts and member-borne commission.
28 July 2016
First published.
Charge controls
'Charge controls' apply to the default arrangements of certain occupational pension schemes that provide money purchase benefits and that are being used as qualifying schemes for automatic enrolment. However, exceptions apply – eg the charge cap does not apply to arrangements which contain third-party promises or guarantees about the level of benefits members will receive. You should assess whether any guarantees or other favourable treatment might be lost on transition and whether any penalties will be triggered. You may wish to seek advice to determine whether or not the controls apply to arrangements in your scheme. You can also refer to the investment governance guidance for further information on default arrangements.
You must comply with limits on charges and how these charges may be structured. Even if your charges look to be below the limit, you'll still be in breach of the law if the charging structure used isn't allowed.
The requirements include making sure that no members' funds in a default arrangement are subject to charges in excess of a cap. If charges are calculated solely as a simple percentage of members' funds, the limit is 0.75% per annum. This is measured over a period called a 'charges year', which may be different from the year end that schemes use for other purposes. If your scheme charges aren't calculated in this way, but are made up of a charge on members' funds plus a charge on contributions or a flat fee, the regulations specify how the cap applies to each element.
The cap on charges applies to particular deductions from member funds. These may include, for example, deductions relating to:
- payments to providers of professional services like administrators, actuaries and lawyers
- costs of member communication services like producing statements, website development, and printing and posting scheme documentation
- investment management fees
- ongoing costs for things like IT, office, staff and record-keeping
Some types of charge or cost are excluded and don't count against the cap, such as transaction costs, which are incurred as a result of buying, selling, lending or borrowing investments. See the value for DC scheme members guidance for further information on transaction costs.
Complying with the charge controls
You need to confirm you comply with the charge controls to us via the scheme return.
You can read about identifying which arrangements are affected and assessing charges in the charge cap guidance for trustees and managers on GOV.UK.
Flat fee threshold on active and deferred pots
On 6 April 2022, a de minimis (threshold) was introduced to prevent flat fee charging on specified default arrangements worth £100 or less.
The threshold is a limit on permitted charges that fall within the charge cap, but doesn’t apply to arrangements that fall outside the scope of the charge cap. The threshold applies to both active and deferred members invested in the default arrangement run by their pension providers, where a flat fee element applies.
The flat fee may only be levied either in full or partially, to the extent that it would not reduce the value of the member’s savings in the default arrangement to below £100. Below are two illustrative examples of how the threshold will work in practice for flat fees levied monthly or annually.
Example 1: Month where only the flat fee of the combination charge is payable:
Apply the flat fee if the pot has a value of £100.01 or more.
- Pot 1 is worth less than £100.01 – flat fee doesn’t apply.
If applying the full flat fee reduces a pot’s value to below £100, then the partial flat fee would apply.
- Pot 2 is worth £100.01 – partial flat fee of £0.01.
- Pot 3 is worth £110.00 – full flat fee.
| Pot value | Threshold | Flat fee (£1.50 per month) | New pot total after monthly flat fee | |
|---|---|---|---|---|
| Pot 1 | £100.00 | Threshold applies | N/A | £100.00 |
| Pot 2 | £100.01 | N/A | £0.01 | £100.00 |
| Pot 3 | £110.00 | N/A | £1.50 | £108.50 |
The threshold only applies to the flat fee element of the combination charge. This means that the percentage of funds under management charge can still be charged, regardless of pot size.
The second example below looks at the annual percentage charge and flat fee when they are payable in the same month.
Example 2: Month where both the annual percentage charge and flat fee are payable:
The annual percentage charge should be applied first to all pots regardless of size.
If a pot is worth £100.01 or more after applying the annual percentage charge, then the flat fee applies.
- Pot 1 is worth less than £100.01 – flat fee doesn’t apply.
- Pot 2 even though it’s £100.25, is worth less than £100.01 after applying the annual percentage charge – flat fee doesn’t apply.
If applying the full flat fee on top of the annual percentage charge causes the pot to reduce below £100, then only a partial flat fee can be applied.
- Pot 3 is worth £100.70 after the annual percentage charge – partial flat fee of £0.70.
- Pot 4 is worth £109.67, after applying the annual percentage charge – full flat fee.
| Pot value | Annual percentage charge (0.3%) | Pot total after annual percentage charge |
Threshold | Flat fee (£1.50) | Total charge |
New pot total after percentage charge and flat fee | |
|---|---|---|---|---|---|---|---|
| Pot 1 | £100.00 | £0.30 | £99.70 |
Threshold applies | N/A | £0.30 |
£99.70 |
| Pot 2 | £100.25 | £0.30 | £99.95 | Threshold applies | N/A | £0.30 |
£99.95 |
| Pot 3 | £101.00 | £0.30 |
£100.70 |
N/A | £0.70 | £1.00 |
£100.00 |
| Pot 4 | £110.00 | £0.33 |
£109.67 |
N/A | £1.50 | £1.83 |
£108.17 |
If a member has multiple pots within the same provider’s default arrangement, which charges a flat fee – then this charge would be based on the combined value of the member’s pots, rather than their individual value. In this case a flat fee can only be levied once per member.
If a member has several small pots of £100 or less in different providers default arrangements, which charges a flat fee – then the threshold applies, depending on the value of the member’s pots with each provider. The flat fee may only be levied either in full or partially, to the extent that it would not reduce the value of the member’s savings in the default arrangement to below £100.