THE days of extortionate exit penalties on pensions are finally coming to an end as providers bow to pressure for greater fairness and transparency.
Some of the UK’s biggest pension firms have announced they are lowering their early exit fees or removing them entirely, ahead of regulatory action on the charges. Exit fees on some contracts will remain unchanged, however, while there are concerns that providers may simply offset lower exit fees by increasing other types of charges.
Exit charges are found mainly on policies taken out in the 1980s and 1990s before the 2001 launch of stakeholder pensions resulted in charges plunging.
The Financial Conduct Authority (FCA) was asked by the government in January to impose a cap on exit fees in both workplace and personal pensions. That will be imposed by the end of March 2017, the FCA said last month.
“The government wants to allow savers to access the pension freedoms, and to address impediments to doing so,” said Carl Melvin, director of Affluent Financial Planning in Paisley. “Legacy pensions and legacy providers will not willingly embrace the new world of transparency, fair costs and the freedom to transfer without penalty.”
Scottish Widows said last week that it will no longer charge exit fees on workplace pensions. Exit fees remain in place on individual pensions, but that policy is being reviewed too.
The firm is among six insurers being investigated by the FCA over possible breaches of rules including communication with customers about exit fees, the regulator announced on Thursday.
Another Edinburgh-based pensions giant, Standard Life, introduced a cap in January at 5 per cent of fund value for all exit penalties on individual and workplace pensions. The charges are in place on policies held by around 154,000 customers, it said.
“Traditionally, most of these customers would have remained invested until their retirement date and many of them will have benefited from a lower annual management charge,” a spokesperson said. “This change will help them if they want to access their money earlier under the new pension freedoms.”
Aviva is also introducing a 5 per cent cap “in the near future” on policies with early termination charges, while Prudential is believed to be planning a cap of below 5 per cent.
Pension providers insist very few customers face exit fees and that they are only in place on older legacy pensions.
But the problem for the hundreds of thousands of savers holding those older policies is that the fees when they are levied can be punitive, wiping out large chunks of their pension savings.
While more than eight in 10 people can take their pensions without penalty, FCA research shows some 40,000 people aged 55 or over face exit penalties of more than 40 per cent of the value of their fund and another 17,000 would be charged between 20 and 40 per cent. Even at 5 per cent, some customers will still pay significant fees if they exit their contract before a certain point.
The belated action on those high legacy charges, which follows growing media and political pressure on pension and investment costs, is long overdue, said Mark Polson, founder of Edinburgh consultancy Lang Cat Financial.
“We’ve always supported the regulator’s stance that consumers should not face unreasonable post-sale barriers to change product or switch provider,” he said.
This should prove to be “the thin end of the wedge” for exit fees in general, he added. “It will be hard for product providers to justify charging exit fees for customers in one type of product and not another. The tide seems to be turning in favour of the customer, and not before time.”
Exit fees take several forms and can be charged for withdrawal, transferring or even for changing the contract. Yet many people are in pension plans not covered by the latest announcements. Market value reductions (MVRs) on with-profits policies are a form of exit fee, but these contracts are likely to be excluded from the government’s proposed cap.
“The biggest issues are things like the MVRs on with-profits, capital unit charges, policy fees and closing administration costs,” said Melvin. “The problem is that if the contract permits the provider to charge these costs, they are entitled to do so.”
There is a concern that pension firms will compensate for the loss of exit fees by scaling down their services or raising costs elsewhere.
“I suspect providers will seek to increase closing costs [rather than exit costs from the product] to cover the admin associated with effecting the transfer,” said Melvin. “This could be high if your provider doesn’t want to play nicely.”
So what can you do if you’re in a plan that still has high exit charges? Your options are limited, according to Melvin.
“You can either accept the charge or remain locked into the existing plan and revisit it if and when the government finally succeeds in mandating an open gateway for transfers, with no exit fees at all.”
There will be instances in which an exit fee is worth paying, if you’re some way from retirement and want to move to a more modern plan with much lower charges.
If retirement is imminent and you took out your pension plan before 2001 you should ask your provider when you can leave without paying an exit fee. It will tell you the maturity date, most likely the retirement date you chose when you entered the plan. It’s worth checking, too, whether your pension has benefits that make it worth hanging on to, such as guaranteed annuity rates.
Pension firms might be starting to play more fairly on exit fees, but taking your pension or transferring it elsewhere can be a complex business, so independent advice is highly recommended.