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Thousands will see pensions boosted by exit fee cap
The government has told the regulator it must enforce a cap on early access charges on pensions.
by Michelle McGagh on Jan 19, 2016 at 15:01
Hundreds of thousands of retirees will see their pensions boosted by as much as 10% as the government announces a cap on pension exit fees.
The Treasury has hobbled providers who charge ‘excessive’ exit fees on those wanting to access their savings using the new freedoms.
A consultation paper last year suggested over-55s were prevented from accessing their pension funds because of high charges.
Now, chancellor George Osborne has confirmed he has tasked the regulator with capping the fees pension providers can levy after being asked about the charges by Conservative MP Gareth Johnson. However, he did not say what level the cap would be set at.
‘The pension freedoms we have introduced have been widely welcomed,’ said Osborne. ‘We know that 700,000 people who are eligible [to use the freedoms] pay some form of early exit charge. The government isn’t prepared to stand by and see people either being ripped off or blocked from accessing their own money by excessive charges.
‘Today we are announcing that we will change the law to place a duty on the [City regulator] to cap excessive early exit charges from pension savers. We are determined that people who have done the right thing, saved responsibly, are able to access their pensions fairly.’
Data collected by the regulator, the Financial Conduct Authority (FCA), last year showed 670,000 consumers aged 55 and over faced an early exit charge.
Of these, 358,000 would be charged up to 2%, another 165,000 faced charges of between 2% and 5%, 81,000 would lose between 5% and 10% and 66,000 would see 10% or more of their savings taken from them.
Gareth Shaw, Saga Investment Services head of consumer affairs, said the move to cap charges was fair and it was ‘absolutely right that consumers aren’t punished for wanting to access their pension flexibly’.
However, he added that it was not just a problem that affected the over-55s and said there could be swathes of younger savers whose pensions were affected by exit fees.
It is estimated there could be as many as 2.2 million savers whose pensions have exit fees built in.
‘The Treasury is using [the 700,000 FCA figure] but there may be more who are not eligible to access pension freedoms now that may face exit fees in the future,’ he said.
‘There are people coming through at a later date who will still be subject to the charges. Someone who took out a pension in the mid-‘90s may face an exit fee.’
He said there was a ‘long history’ of exit fees being levied by pension providers and it would take a while for the fees to move through the system.
Exit fees were placed on pensions to cover the initial costs of setting up a pension should someone encash their fund earlier than expected – typically before age 65.
Andy Bell, chief executive of AJ Bell, said it was questionable ‘whether it is still reasonable to still be collecting charges for events that many 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 ongoing provider profitability,’ he said.
‘In reality the charge was baked into the contract many years ago to ensure the provider made the requisite amount of money out of the product.’
While the cap has been welcomed by consumers and financial advisers, the Association of British Insurers (ABI) was less enthusiastic, stating that just 20% of people faced an exit charge.
In a statement, ABI director of long-term savings policy Yvonne Braun said: ‘We note the announcement by the chancellor today that he plans to introduce a new duty on the FCA to cap exit charges on pensions. As the FCA acknowledge, more than eight out of 10 customers do not have to pay early exit charges to access their pensions.
‘Where they do, most fees are below 5% and were put in place decades before the freedom and choice reforms were introduced. We will engage with the FCA and Treasury on this issue going forward.’
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