Government to cap pension exit penalties

George Osborne has confirmed the Treasury will introduce a cap limiting the exit penalties savers are forced to pay when they leave a pension.

Following the introduction of pension freedoms in April last year, all savers are able to access their pension pots from the age of 55. However, in some cases, excessive early exit penalties are making the costs prohibitive.

Figures released by the Financial Conduct Authority show that the vast majority of pension savers (83.6%) will not have to pay an exit penalty on their pension. However, 9.2% face a charge of up to £250, 4.6% are paying between £250 and £1,000 and a very unlucky 2.6% are facing charges up to £5,000.

Tom McPhail, head of retirement policy at Hargreaves Lansdown said: “We welcome this announcement. Hundreds of thousands of pension investors currently face charges and restrictions if they want access to pension freedoms or to transfer their money to a new pension arrangement. In some cases these penalties can run to hundreds or even thousands of pounds. This kind of financial bondage has no place in the 21st century.”

He added: “Investors who are looking to take advantage of the freedoms but who are currently facing exit penalties, may want to hold back now in order to benefit from the new ban, though it is unclear at this stage how rapidly the change can be introduced.”

Andy Bell, chief executive of AJ Bell also welcomed the move. Although he said he would prefer an outright ban, he agreed a cap was a big improvement on the current situation.

“45% of financial advisers we spoke to have clients that have been prevented from accessing the new pension freedoms due to early encashment penalties. The whole point of pension freedoms was to give people flexibility and choice, if you can’t offer your customers that, why should you be allowed to charge them an early encashment penalty if they want to transfer somewhere else?” he said.

Bell also questioned the ongoing need for exit penalties. “The main reason given for exit fees is to cover initial costs but you have to question whether it is reasonable to still be collecting charges for events that may have happened around a quarter of a century ago.  It is debatable whether some exit fees really do relate exclusively to initial set up costs or whether they are actually about on-going provider profitability.