The government has confirmed it will introduce a new cap in March next year that will limit the fees some savers are forced to pay when they exit a pension.
Following its consultation, the government has concluded that there are sufficient over-55s who are eligible to access their pensions flexibly, but are discouraged or prohibited by the size of the exit fee on their pension.
Although data from the Financial Conduct Authority suggests the majority of savers do not need to pay any exit fees (84%), some 9% are having to pay up to 2% of their savings, while 4% have to pay between 2% and 5% and between 3% and 4% are facing charges of 5% or more. According to the Pensions Regulator, 11% of trust-based schemes imposed some form of exit charge on their members.
Consumer research conducted by the Treasury also revealed that some 30% of respondents have had their plans to access their pensions impacted by fees.
The Treasury stressed that it found no evidence that providers were imposing “new exit fees or charges in order to exploit the pension freedoms, or gain commercial advantage from them’, rather that charges were being applied ‘in the context of contractual agreements, entered into before the conception of flexible pensions”.
The size of the cap will be set at a later date by the FCA and will strive to strike the correct balance between “the important public policy objective of ensuring that early exit fees do not pose an unreasonable barrier to people accessing the pension flexibilities, and the contractual property rights of pension firms”.
In addition to setting the cap, the Treasury has also confirmed it will work with the pensions industry to improve the pension transfer process. Although the average transfer between FCA-regulated schemes is a reasonably fast 16 days, those in trust-based schemes face a typical 39 day wait, but many suffer delays and can expect a considerably longer wait.
Commenting on the government’s response, Nathan Long, head of pension research at Hargreaves Lansdown says: “Capping early exit charges will unshackle thousands, allowing them to enjoy the pension freedoms in all their glory. Research has shown that would be retirees have already had to change their plans because of punitive penalties.”
“The government will also get tougher on transfer times, something which has been a thorn in the side of the retirees for years. Among the worst offenders, trust based company pension schemes will be forced into reporting their transfer performance. Transfers from these schemes currently take significantly longer and have to improve to give people a smoother, less stressful passage to retirement.”