Caption: Lisa Bennett
The Government have had concerns over the substantial penalties associated with some old pension contracts. These penalties are preventing a significant number of people from accessing their pensions using the highly publicised ‘Pensions Freedoms’.
In a bid to resolve this, the Financial Conduct Authority (FCA) has recently proposed plans to place a 1% cap on these penalties when people want to take the benefits from their pensions before their selected retirement date. For existing contract-based personal pensions, including workplace personal pensions, this means that exit charges will be capped at 1% of the value of the pension pot. Also, firms will not be able to apply any exit charge for personal pension contracts that are entered into after the proposed new rules come into force.
On another note, the Department for Work and Pensions (DWP) is to consult on plans to cap exit fees for those with occupational pensions.
Christopher Woolard, director of strategy and competition at the FCA, said, “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.”
The proposed changes are expected to cost the industry over £100 million, and the regulator predicts that this will allow a further 37,400 people to access their pension pots before their selected retirement date. It might sound like a win for consumers; however, it will still mean that a person with a pot of say £30,000 will face a penalty of £300 if they retire their pension early.
My other concern is that for existing savers, the penalty cap will only apply to those who retire their pensions before their selected retirement date; it will not apply to those who would like to transfer their pension to another provider while they are still saving. Although it will be great news for many existing savers, there will be many who will continue to be penalised for saving for their retirement.
Please note: As set out in the consultation, market value adjustments and a loss of terminal bonuses are not considered exit charges for these purposes.