Exit fees on pensions should be capped at 1%, according to the Financial Conduct Authority.
The regulator will now consult on its proposal, which would apply to all personal pension contracts – including workplace pensions.
Pension providers will also be prohibited from charging any exit fees at all on new schemes set up after the proposed rules come into force in March 2017.
Christopher Woolard, director of strategy and competition at the FCA says: “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. This is an important step so people feel able to access their pension savings should they wish to.”
Currently some 16% of pension savers face charges when they exit their fund – either to cash it in or switch to an alternative plan. In the worst cases these fees can be as much as 5% of the total fund.
Tom McPhail, head of retirement policy at Hargreaves Lansdown welcomes the cap. “Exit penalties on out-dated pension contracts have absolutely no place in the modern pension savings system. Capping these fees will provide significantly better choices for investors wishing to use the pension freedoms.”
However he does not think they go far enough. “The fee should be capped at 0% and this would benefit a further 150,000 investors. A 1% cap is something of a victory for corporate vested interests. We hope that the cap can be brought up to a zero tolerance of exit barriers in due course.”
One major flaw is the fact the cap will only come into force for savers aged over 55. Mr McPhail explains: “The cap also only applies to those exercising the pension freedoms. Those wishing to transfer old, expensive private pensions to improve their value for money, while they are still building their savings, will not benefit from the cap. This penalises those who are doing the right thing by saving but are hamstrung from making competitive choices which would help their hard earned money work much harder.”