The Financial Conduct Authority (FCA) is pushing for existingfreedom exit charges to be scrapped and replaced with a maximum upper limit of 1% of the pot’s total value for existing contracts. In addition, new pension freedom contracts would be subject to no early exit charges at all. If brought into effect, the change could translate to enormous savings for hundreds of thousands of pension savers at all levels.
Extensive pension reforms brought in by George Osbourne changed the rules on pension pot access, allowing savers to cash in their pots as an alternative to purchasing annuities for long-termincome. However, the scheme was not universally applauded due to the way in which those choosing to exit their current schemes would be liable for rather hefty fees.
“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,” said FCA Director of strategy and competition Christopher Woolard.
“This is an important step so people feel able to access their pension savings should they wish to.”
Figures published by the FCA this week suggest that approximately 16% of customers – equating to around 700,000 savers – with contract-based pension schemes will find themselves liable for early exit fees, should they decide they wish to cash out their pension pots before they reach retirement. Broken down a little further, 66,000 of those with such schemes will have to pay a 10% or higher exit fee, around 81,000 will pay between 5% and 10%, 165,000 will pay between 2% and 5% while approximately 358,000 will pay exit fees between 0% and 2%.
“Nearly quarter of a million people have already taken advantage of the government’s pension freedoms, accessing their money when it suited them,” Osbourne said.
“And I am clear that people who have done the right thing and saved responsibly should be able to access theirfairly. They shouldn’t face prohibitive charges that block them from exiting their current deal.”
The announcement was welcomed by consumer watchdog Which? though it was pointed out that far too many savers are still liable for excessive charges, depending on their choice of product.
“It’s right that the FCA is bringing in this cap on pension exit fees” said Alex
Neill, director of policy and campaigns at Which?
“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.”
While this particular proposal would only impact those aged 55 and over, the FCA insisted that other schemes and initiatives should be considered for savers in different age groups. Industry responses will be accepted by the FCA until August 18.