Pension firms to be banned from applying exit charges
The Financial Conduct Authority (FCA) has proposed that exit penalties for those wishing to exercise pension freedoms, which came into effect in April 2015, will be capped at 1% of the value of their fund.
An exit fee is charged to a member when they transfer or start to draw on their pension benefits after the age of 55 but earlier than their expected retirement age and it covers up front set up costs and commissions.
The cap will apply to personal, stakeholder and self-invested personal pensions, but not to occupational pensions as these exit fees are subject to a separate consultation.
For any new personal pension contracts entered into after the proposed new rules come into force, firms will be banned from applying any exit charges.
However the new caps won’t apply to those wishing to transfer old, expensive private pensions to improve their value for money while they’re still building up their retirement savings.
The move to cap charges comes after the Treasury announced in January that it would introduce legislation to bring an end to ‘excessive’ charges for people who want to access their pension pot early. See YourMoney.com’s ‘Excessive’ pension exit charges to be scrapped for more information.
‘This cap doesn’t go far enough’
Tom McPhail, head of retirement policy at Hargreaves Lansdown said: “Exit penalties on out-dated pension contracts have absolutely no place in the modern pension savings system. Capping these fees will provide significantly better choices for investors wishing to use the pension freedoms.
“However, this cap does not go far enough. The fee should be capped at 0% and this would benefit a further 150,000 investors. A 1% cap is something of a victory for corporate vested interests. We hope that the cap can be brought up to a zero tolerance of exit barriers in due course.”
McPhail added that as the cap only applies to those exercising pension freedoms, it “penalises” those who are doing the right thing by saving but are “hamstrung” from making competitive choices which would help their hard earned money work much harder.
Investors may have to wait until March 2017 for the cap to take effect but Hargreaves Lansdown is writing to the FCA to confirm that anyone wishing to transfer from today’s date can have a guarantee that they can reclaim any charges as it “wants the ban to start immediately.”