The pension change that will unshackle £10bn of savers’ cash
Over £20bn of pension money is currently invested in old-style pension contracts with exit penalties, according to analysis by broker AJ Bell.
The 1% cap on early exit charges, coming into force on 1 April, will unshackle £10.6bn of this cash, the research suggests.
Financial Conduct Authority (FCA) data shows 670,000 savers aged 55 or over hold more than £22.5bn in pension policies that levy a charge if they leave the contract before a pre-determined retirement date.
Of this, £10.6bn will incur an exit penalty of 1% or more and £6.2bn will have an exit penalty of 2% or above – meaning the 1% cap could make a significant difference.
The 1% cap on existing polices was announced last year after some providers were found to be charging exit fees as high as 10%, wiping thousands of pounds off the pots of savers who were using pension freedom rules to access their money. Exit fees on new pension contracts will be banned altogether from 1 April.
For some savers with policies written in the 1970s, 1980s and 1990s, exit charges equate to a whopping 40% or more of their pension pot, according to the FCA.
‘Time to dig out the policy documents’
Tom Selby, senior analyst at AJ Bell, said: “Anyone who has a policy with an exit fee should review it urgently because, in many cases, they will be able to get a much cheaper deal elsewhere.
“They will need to take care that they don’t give up any valuable benefits in their existing policy, such as a guaranteed annuity rate, but now is definitely the time to dig out the policy documents and weigh up the pros and cons of a switch.”
While some savers may be reluctant to pay a 1% exit penalty, it will be worthwhile for most who will benefit from lower annual charges in the longer-term.
“Even a relatively small reduction in annual charges could translate into a pension worth tens of thousands of pounds more in the longer-term,” said Selby.
The table below shows how much more or less an investor would have if they switch pensions compared to staying where they are. It is based on switching £100,000 from a pension with a current annual charge of 1.75%, 1.5% or 1.25% and an exit penalty of 1%, to a new pension with a lower annual charge of 1%.
It assumes investment growth of 5% before charges are deducted and shows that the 1% exit penalty is quickly recouped by the additional positive return due to lower charges.
|Year||1.75% charge||1.5% charge||1.25% charge|
Source: AJ Bell