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The pension change that will unshackle £10bn of savers’ cash

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06/02/2017
Hundreds of thousands of savers locked into poor value pension contracts because of rip-off exit fees could be unshackled from April this year.

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
1 -£290 -£540 -£790
2 £473 -£44 -£562
3 £1,291 £490 -£316
4 £2,168 £1,064 -£49
5 £3,107 £1,680 £239
10 £8,855 £5,484 £2,040
15 £16,727 £10,759 £4,585
20 £27,337 £17,942 £8,106

Source: AJ Bell

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