Savers are still being hit by often extortionate exit fees on transferring funds out of their pension pots, despite proposals to crack down on the practice.
The charges have returned to the spotlight in the wake of reforms that took effect in April making it easier for people aged 55 or over to access their pension pots.
While most pension savers are now in modern low-cost contracts that are free of exit penalties, the charges levied on a sizeable minority of people in older plans are often punitive.
Research by the Financial Conduct Authority (FCA) found 84 per cent of people eligible to access pensions under the new rules are not charged on exit.
However the regulator also revealed that 4,000 people aged 55 or over face exit penalties of more than 40 per cent of the value of their fund. Another 17,000 are charged between 20 and 40 per cent of their fund value.
The Treasury is currently looking at exit fees as part of a consultation on barriers facing people seeking to take advantage of the so-called pension ‘freedoms’. It has proposed three possible measures - a cap on all early exit fees; a flexible cap; and voluntary fees.
However it’s not looking at with-profits policies, which levy exit penalties called market value reductions (MVRs, which were also excluded from the FCA research).
But while that’s being addressed many people still risk incurring charges that could hugely undermine a lifetime of saving.
Sarah Tory, financial adviser at Shepherd & Wedderburn Financial in Edinburgh, said: “Though pension contracts taken out today do not carry exit charges, many of those started in the 1980s and 1990s will have some kind of charge for taking out cash, transferring or changing the contract. In some cases this could be a not insignificant and potentially prohibitive amount.”
The problem is that most people will be unaware of any exit charges until they actually try to move out.
So what do you need to look out for if you’re in an older contract where fees could be lurking in the small print? Exit penalties are especially likely to be in contracts where the plan contains capital units, according to Tory.
“These were units allocated to a plan from the investment to pay charges, typically adviser commissions, if the plan is closed early they are clawed back in the form of an exit charge,” she said. “Another plan likely to have an exit charge would be an older style pension contract known as a retirement annuity contract, or S226”
The initial units on many old personal pensions are rarely included in any transfer value given on the move to a new provider, noted Iain Wishart, owner and chartered financial planner at Wishart Wealth Management. “Careful analysis is required to see if it is worth paying the financial penalty and moving,” he advised.
Exit charges on old pension plans can often be avoided if the transfer occurs on the maturity date. This is usually the retirement date you selected, so if you’re nearing retirement it’s worth checking with your provider when the fee-free period begins. With that in mind it’s not always a good idea to move your selected retirement date (if you want to defer taking your pension benefits, for example), as it could trigger a new five-year exit charge period. It’s also worth noting that many older contracts will have far lower death benefits than modern plans.
“For example, they will only pay out what you’ve put in, not what your pot of money is worth,” said Tory.
“Add to that an exit penalty and the saver can have to choose between the lesser of two evils.”
The exit fees - MVRs - on with-profits policies can be particularly steep and the terms tend to vary considerably from provider to provider.
“Some providers will not apply an MVR if the pension plan runs to the original maturity date. Some still do unless the client annuitises,” said Wishart.
He recommends comparing the transfer value with the fund value and getting professional advice if there are any discrepancies between the two figures.
If you’re transferring any pension policy you should look out too for excessive administration fees, which typically range from £75 to £300. These are increasingly rare, but one national advice firm still charges exit fees of up to 6 per cent in the first six years of the investment, said Wishart.
“It is quite shocking you could pay this simply to access your own funds.
“No consumer should have to pay exit fees at these levels simply to change providers.
“The regulator needs to ban such high exit fees as a matter of urgency.”