Pension savers will still face hefty charges to get out of certain pension contracts even after a new cap on exit fees takes effect next year.
The charges faced by people taking advantage of the so-called pension “freedoms” introduced last year will be capped at 1 per cent from next April, the Financial Conduct Authority (FCA) has announced.
Providers will also be preventing from including exit charges in new pension contracts and from increasing exit fees on existing pensions if they are below the proposed cap.
The measures affect personal pensions, including stakeholder, Sipps and those taken out through the workplace, but they won’t apply to trust-based workplace schemes. They are under the remit of the Pensions Regulator, but the government is now consulting on plans to restrict exit fees on those schemes too.
But many other savers will continue to pay excessive fees when transferring their pensions, while there are concerns that some providers will respond to the cap by increasing other charges. Providers had expected the ceiling to be set at 5 per cent and were surprised at the low level of the cap, said Rachel Vahey, Edinburgh-based independent pensions consultant.
“This is good news for consumers who want to move their pension money to take advantage of pensions freedoms and choice, which they can’t access in their current pension schemes. For many, it will remove a significant barrier.”
The cap was broadly welcomed by consumer groups and sections of the industry. But there is a school of thought that FCA should scrap exit fees entirely if it considers them to be unfair.
“It’s a sad reflection on the industry that it has to be forced to do something that is clearly the right thing to do,” said Mark Polson, founder of the lang cat, an Edinburgh-based financial services consultancy.
“I would have preferred a cap at zero and while it’s probably too much to hope for, I would like to think that big firms will take this opportunity to be aggressive and scrap their exit fees.”
If they don’t, they may yet find that regulatory momentum takes them in that direction, he added.
“The assault on very profitable back books will continue, and if you’re a company that makes money by depending on customers not doing anything at all your world is only getting harder.”
Exit fees are typically found on older pension contracts, and FCA figures show that more than eight in ten people don’t have to pay exit charges to access their pensions. They are often linked to commission-based contracts, so their continued existence in the post-commission era is an anomaly.
“There are not many straight investment products that charge them now, so it’s mainly on the old back books,” said Polson.
But where they do apply they can take a big chunk out of their pension pot. Around 4,000 people aged 55 or over are in policies with exit penalties that could amount to more than 40 per cent of their fund, with another 17,000 facing charges of between 20 and 40 per cent of their fund value, according to the FCA.
Some pension firms pre-empted regulatory intervention by making their own changes. Scottish Widows announced in March that it would no longer charge exit fees on workplace pensions and said it would review those in place on personal pensions. Another Edinburgh-based provider, Standard Life, introduced a cap in January at 5 per cent of fund value for all exit penalties on individual and workplace pensions.
Jamie Jenkins, head of pensions strategy at Standard Life, said: “Standard Life was one of the first providers to cap exit charges and we always maintained that we would review this once we heard further from regulators.”
It said fewer than 7 per cent of its pension customers are in policies with exit charges, with the average being 1 per cent for those that do have them.
The cap taking effect next year will only apply to people aged 55 or over and taking advantage of the pension freedoms. Savers below that age and wanting to transfer away from of old pension policies to lower cost alternatives will continue to face chunky exit fees, as will people in with-profits pension plans.
Those policies come with exit penalties known as market value reductions, but they won’t be covered by the FCA cap or the one the government is proposing to set on occupational pension exit charges.
“People will need to understand exactly how their current pension plan works,” said Vahey. “It’s not as simple as saying that only an up to 1 per cent charge will apply in all cases; we already know that certain pension schemes – for example those invested in with-profits funds – will be treated slightly differently. This just emphasises that before making any transfer or retirement income decision people need to get all the facts and understand all their options.”
The cap may have implications for other investment and pension products, as exit fees become a point of scrutiny. The new lifetime Isa, taking effect next year, will come with an early exit penalty of 5 per cent for pension savers taking the proceeds before turning 60, but the government is under pressure to review that even before the launch.