In Depth

Is the pension exit charge cap too high?

New schemes will not be able to apply a charge, but old funds can charge one per cent

The introduction of pension freedoms last year meant that hundreds of thousands of people could access their pension savings. As a result people have been withdrawing money, transferring providers and making the most of having complete control of their retirement savings.

However, many have had to pay a hefty price for doing so. Many pension firms charge extortionate early exit fees to people wanting to access their savings.

An investigation by the Financial Conduct Authority (FCA) found that 670,000 people aged 55 or over faced an early exit charge. Of these, 358,000 faced charges between zero and two per cent, 165,000 between two and five per cent, 81,000 between five and ten per cent and a particularly unfortunate 66,000 would have to hand over more than 10 per cent of their pension savings if they wanted to access their cash between the ages of 55 and 65.

With many pension pots worth hundreds of thousands of pounds this means people could be forced to part with thousands of pounds in order to enjoy the pension freedoms the government introduced.

Early exit fees are usually charged when someone aged between 55 and 65 tries to withdraw or transfer their retirement savings. It's in theory a way to reimburse providers for lost interest, but some appear excessively punitive.

The FCA has now announced that it will be bringing in a cap on pension exit fees. From 31 March 2017 pension firms will not be able to charge more than oner per cent in early exit penalties on existing pension schemes. New schemes won’t be able to charge exit fees at all, and any schemes that currently have exit fees of less than the new cap will be banned from raising them.

“People eligible for the Government’s pension reforms should feel able to access them as they wish,” says Christopher Woolard, executive director of strategy and competition at the FCA. “The one per cent cap will mean that savers will not be deterred by these charges from accessing their pension pots.

However, the new cap hasn’t been embraced wholeheartedly by experts. Many believe the FCA hasn’t gone far enough. 

“The capping of early exit penalties at one per cent is a huge step in the right direction,” says Nathan Long, senior pension analyst at Hargreaves Lansdown. But, this "could still be a chunky sum to lose from your pension at the point of retirement.”

His feelings were echoed by Tom Selby, senior analyst at AJ Bell. “The cap is a start but one per cent of a £100,000 pension is still a £1,000 charge for accessing your own savings.”

Citizens Advice has pointed out that most exit fees represent pure profit for the pension firms as the charge is hugely disproportionate when compared to the actual admin cost of granting someone early access to their pension.

“A £50 cap would have been preferable – as that covers the cost to a provider of actually exiting your pension, says Gillian Guy, chief executive at Citizens Advice.

If you are thinking about making the most of the pension freedoms to access or transfer your pension savings make sure you understand what exit penalty you may have to pay and calculate whether it is still worth moving your money.

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