The fees savers are charged for cashing in or transferring their pensions are to be capped at 1%.
The Financial Conduct Authority confirmed that the cap on personal plans will come into force on 31st March 2017, while the Department of Work and Pensions will introduce the same cap for occupational schemes in October 2017.
In both cases providers of new pensions will not be able to introduce exit fees at all, while the FCA also said that existing personal pension providers currently charging less than 1% would not be able to increase their fee either.
The new caps will make it easier for retirement savers to access the pension freedoms and either cash in their pot or transfer it to a rival provider. Some plans currently charge as much as 5%.
Christopher Woolard, executive director of strategy and competition at the FCA says: “People eligible for the government’s pension reforms should feel able to access them as they wish. The 1% cap on early exit charges for existing pensions, and the 0% cap for new contracts, will mean that current and future savers will not be deterred by these charges from accessing their pension pots.”
This view was echoed by Richard Harrington, the new minister for pensions. “We are restoring fairness and creating a level playing field in a system that has favoured the interests of providers over consumers for too long. This new cap will protect people’s savings from excessive charges, so more of their money will go towards the comfortable retirement they have saved for.”
Nathan Long, senior pension analyst at Hargreaves Lansdown, adds: “The capping of early exit penalties at 1% is a huge step in the right direction. The 147,000 people aged over-55 who were facing exit penalties in excess of 5% will be relieved that they are now able to transfer to a more modern pension now the shackles have been released.”
Cap doesn’t go far enough
However, Tom Selby, senior analyst at AJ Bell says the changes don’t go far enough. “The cap on early exit fees for pensions, including occupational schemes, is a start but 1% of a £100,000 pension is still a £1,000 charge for accessing your own savings.
“We hope the authorities continue to monitor the cap to assess whether it should be lower or even abolished if early exit penalties continue to prevent people utilising the new flexible pension rules.”
Mr Long adds: “It remains important to be vigilant when transferring pensions, as 1% could still be a chunky sum to lose from your pension at the point of retirement. There are also hundreds of thousands of people with large exit penalties under the age of 55 for whom the exit penalty cap will not help with pre-retirement consolidation, so it pays to be aware especially with older style pension plans.”
In addition, Mr Selby hopes the new cap will be applied to other savings products. “The 1% cap on early exit penalties for pensions also makes the 5% government sanctioned early exit penalty for the Lifetime ISA look preposterously inconsistent. Now the policy for pensions is confirmed, we’d like to see the same principles applied to the Lifetime ISA and the Government remove the 5% early exit fee before it launches in April 2017.”