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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

Thousands will see pensions boosted by exit fee cap

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.’

9 comments so far. Why not have your say?

archie scott

Jan 19, 2016 at 15:14

never mind the fees being charged by pension providers - what about a cap on the charges FCA regulated advisers can charge - when pension providers will not allow access to pension without first seeking advice first i.e. from FCA regulated advisors. Although you might want full access to funds e.g to transfer the value of a defined benefits scheme into a SIPP - pension providers insist you pay an FCA regulated financial adviser before they will allow you to make such a transfer - what about a cap on thee enormous fees they charge - I've typically been quoted 3% when I know exactly what I want to do but my pension providers insist I cannot make transfers without first paying an GCA regulated adviser ?

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Annoymous

Jan 19, 2016 at 16:15

Archie - it should never be a percentage of the value - the work in question should be based on a fee structure and obviously you are paying for a FCA Regulated Adviser for his time - if these safeguards did not exist then sadly the sharks would circle - low and behold the consumer would scream - we need REGULATION - it is what it is - but find ensure you establish the time it will take the adviser to do the work required - properly - and then pay him - you would do the same if you needed legal advice or accountancy work

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RippedOff

Jan 19, 2016 at 16:17

Aviva insisted on involving a IFA before allowing access to drawdown. I took this to the FOS and during their consideration Aviva announced that they had 'listened to their clients' (plural) and now allow this facility without an IFA.

I suggest others try with their "restrictive practice" fund manager.

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Top Invester

Jan 19, 2016 at 16:37

Archie Soft, I was in the same boat as you last year and manage to find a FCA regulated advisor whom charged me very little.

If you want help on the , matter, then email me on, littleaston@yahoo.co.uk

I know exactly how you feel.

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Dave Knight

Jan 19, 2016 at 16:44

@ Archie Scott.

This might sound a bit unfair to you, but consider the position of the adviser when he charges you peanuts to follow your direction and set up what you want, even if it is not in your best interests.

When it all goes **** up in several years time, and you realise you made an expensive mistake due to lack of knowledge (or sometimes common sense), who will take the liability for compensation? It won't be you will it?

Frankly, any adviser who transacts this sort of business for an "insistent client" (unless it actually IS best advice) is asking for trouble down the line.

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archie scott

Jan 19, 2016 at 16:57

@ Dave Knight

I'm a relatively experienced investor who is both single and with health issues. I'm quite happy to take responsibility for my own actions - I just dont see the need to pay an FCA thousands of pounds so that I can transfer funds from a defined pension into a SIPP - Quite frankly I could do most of the admin work myself

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RippedOff

Jan 20, 2016 at 12:53

archie scott,

At the end of the day, its your money and my experience with a number of IFAs (one with not enough space to show all his INDUSTRY awards) is they are a waste of time and (your) money. Most SIPP providers have guides which can be followed by anyone (at a mature age ?) with a basic understanding of investments and pensions.

Start with Pension Wise (free).

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Dave Knight

Jan 22, 2016 at 11:12

@ archie scott

Legislation is not usually framed for the benefit of those who know what they are doing. It is framed to protect those who do not, and have neither the knowledge or experience to do things themselves. Legislation always caters to the lowest common denominator.

That's why you are supposed to call in a professional electrician if you want to change a plug socket these days! Do it yourself and you are more or less a criminal. It just protects the terminally stupid from their own actions, and the pensions legislation is there for the same basic reasons.

You still won't face any claim if you get it wrong yourself....but an adviser would.

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RippedOff

Jan 22, 2016 at 14:02

archie scott,

I had to inform my 'super IFA' that male and female equality annuity rights were in force a month after this became effective. After he had provided out of date advice. The deal included a 4 figure fee and an exorbitant hourly rate. I sacked him after a number of blunders.

If you engage an IFA the 'front-end' fees would of otherwise have hopefully grown over time. The alternative is to suffer a known loss.

Not employing an IFA is the best thing I have done (in investments). And I don't pay these commissions.

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