The FCA imposes ban on pension exit fees for consumers with pension pots, but leaves all existing savers having to pay a capped 1 per cent of their total pot value
The pension freedoms, which came into effect on 6 April 2015, signalled the end of the traditional pension savers having to buy an annuity, enabling those who had worked hard and saved all their lives to access their savings how and when they want. Since then almost 400,000 pension pots have been accessed flexibly under the new freedoms with many providers offering their customers a range of options.
But even though flexibility was given to savers, current and legacy pensions were still affected by rip-off exit charges. On the 19 January this year, Chancellor George Osborne announced the governments position to end theses prohibitive charges faced by people looking to access their pension pot. Osborne also outlined proposals to place a duty on the Financial Conduct Authority (FCA) to cap excessive early exit charges for those eligible to access the pension freedoms.
Speaking at the time in the House of Commons, replying to Treasury Oral questions the Chancellor George Osborne said: “The pension freedoms we’ve introduced have been widely welcomed, but we know that nearly 700,000 people who are eligible face some sort of early exit charge.
“The government isn’t prepared to stand by and see people either ripped off or blocked from accessing their own money by excessive charges. We’ve listened to the concerns and the newspaper campaigns that have been run.
“Today we’re announcing that we will change the law to place a duty on the Financial Conduct Authority to cap excessive early exit charges for pension savers. We’re determined that people who’ve done the right thing and saved responsibly are able to access their pensions fairly.”
Following the consultation by the FCA, it announced on 26 May 2016, that firms will no longer be able to apply any exit charges for personal pension contracts entered into after new rules come into force. However, for existing contract-based personal pensions, including workplace personal pensions, early exit charges can still be applied but will be capped at 1 per cent of the value of a member’s pot.
In its consultation paper, the FCA said: “There is no such justification for early exit charges in the post-RDR adviser and product landscape. The FCA which has previously investigated fees charged to savers found that 670,000 consumers aged 55 or over faced an early exit charge.
Of these, 358,000 faced charges up to two per cent, 165,000 faced charges between two and five per cent, 81,000 faced charges between five and 10 per cent and 66,000 faced charges above 10 per cent.
These exit fees meant diligent savers who had built up a £50,000 pension pot would have been forced to pay fees in excess of £5,000, with some charging as much as 40 per cent of the pot to access their pension savings early.
The FCA will be given both the power and duty to cap exit fees by Parliament once the relevant section in the Bank of England and Financial Services Act 2016 comes into force. This aims to ensure that consumers can access the government’s pension reforms easily and affordably.
“This cap does not go far enough. The fee should be capped at 0 per cent and this would benefit a further 150,000 investors.” Tom McPhail, head of retirement policy at Hargreaves Lansdown
Some within the industry have already taken proactive steps to address the issue of exit fee, specifically on legacy pensions. LV= for example have committed to the removal of all residual exit fees by the end of 2017, and are actively looking at whether they can implement this self-imposed deadline sooner.
Christopher Woolard, director of strategy and competition at the FCA said: ‘Together with the ban on exit fees in future contracts, we are proposing a 1% cap on exit charges in existing contracts to ensure people can access their pension pots without being deterred by charges. This is an important step so people feel able to access their pension savings should they wish to.’
Citizens Advice responded to the FCA’s announcement to ban exit charges on new pension contracts, claiming instead of the 1 per cent cap, there should be a fixed limited of £50.00 on exit fees, claiming it would be fairer for consumers.
A spokesperson for Citizens Advice said: “A ban on excessive exit fees for new pensions is welcome, but that a 1% cap on current pensions could mean many still face high charges to access their retirement savings.’
Gillian Guy, chief executive of Citizens Advice said: “Sky-high exit charges can be a barrier to people making the pension choice which is right for them. The FCA’s decision to abolish exit charges for new pensions is really good news for those consumers which will help them make the most of the pension freedoms.
“But a 1% cap on current schemes is too high, this means someone with an average pension pot of £30,000 could face a £300 exit fee if they move to another provider. A standard £50 fee to cover the administrative costs would be much more reasonable. Exit fees are not the only problems people are experiencing, some face delays in accessing their pot and others are being hit with charges to transfer their pension. It is important the government now looks at how it can tackle these other barriers to ensure people can plan for a financially secure retirement.”
Separately, the Department for Work and Pensions announced this week its own consultation ‘Capping early exit charges for members of occupational pension schemes’ which will run for a period of 12 weeks.
Alex Neill, Which? Director of Policy and Campaigns, said: “It’s right that the FCA is bringing in this cap on pension exit fees. People shouldn’t be unfairly penalised for accessing their money.
“This announcement is a good first step and the regulator must now turn its attention to other charges people face when trying to make the most of the pension freedoms.”
Pensions minister Baroness Altmann said: “These changes are about giving everyone who has worked and saved hard for their retirement a fair deal by removing the final barriers to the pension freedoms. I encourage the industry and all those with an interest to contribute to this debate.”
Simon Laight, pensions expert at Pinsent Masons, was critical of the reforms in respect to closed book firms, who bought back books assuming a certain level of charges income. Laight accused the government of ‘interfering’, by taking away part of that income stream, affecting firms’ property rights, in the name of public policy.
Mr Laight, then stated: ‘There is also an interesting juxtaposition: Government bans early exit charges for new pension contracts; Government mandates 5% penalty for early access on its new flagship lifetime ISA. Go figure.’
For savers who have an occupational scheme, the Department for Work and Pensions launched a consultation to look at preventing those in occupational schemes accessing their pensions early also facing high exit fees. The consultation on occupational scheme exit fees closes on August 16.