“Excessive” charges applying to savers accessing their retirement savings will be banned under new plans by City watchdogs to impose a 1% cap on fees when over 55s withdraw their money.
Following a Financial Conduct Authority (FCA) investigation which found that at least six British pension firms applied charges to customers’ pensions without telling them, as many as two million savers could have eye-watering exit fees of up to 40% of their retirement funds waived.
Are you fully aware of all the charges on your pension? Could excessive charges be hurting the performance of your pension? Have you reviewed your pension in light of recent changes in legislation?
The proposals will most directly impact consumers with pensions savings who would incur an early exit charge for accessing the pension freedoms; as well as providers of personal and stakeholder pensions, including operators of self invested personal pensions (SIPP).
In a detailed proposal published today (click here to view), the FCA said new personal pensions and work pensions should not be allowed to apply any penalties to savers who want to access the money in their pension pot after age 55.
Such exit penalties were written into millions of pension and other policies sold in the Seventies, Eighties and Nineties. Insurance companies included the clause to ensure they could recoup the cost of generous commissions paid to salesmen.
The FCA said penalties for existing savers with older pension plans should be capped at 1% of the pension pot’s value.
This will be a blow for pension providers, but welcome news for savers wanting to withdraw cash from their pensions under the Government’s new freedoms.
Unfortunately, expats who have transferred their pension into a Qualifying Recognised Overseas Pension Scheme (QROPS) may still be subject to excessive charges and redemption penalties on the underlying insurance or investment bond within their QROPS, with many simply unaware of the high level of charges they are paying.
Changes announced by the Government in 2014 and applying from April 2015, allowed anyone over 55 to withdraw some or all of the cash in their pension pot.
This swept away the need for many to buy costly and unpopular annuities. It also meant that many savers wanted to bring forward the point at which they accessed their pension cash.
However, many people were prevented from doing so by hefty charges levied by their provider. The hefty charges mostly applied to old-style personal pensions sold by large insurance companies in the Eighties and Nineties.
Capping the exit fees at 1% is only a partial victory. Exit penalties have no place in the modern pension savings system. The fee should be capped at 0% and this would benefit a further 150,000 investors.
At insurer LV, which operates some pension plans were penalties apply, director John Perks said: “Clamping down on excessive exit fees is the right thing to do.
“We only have exit fees for a limited number of legacy pensions.”
Alex Neill of Which?, the consumer lobby group, said: “People shouldn’t be unfairly penalised for accessing their money.
“This announcement is a good first step and the regulator must now turn its attention to other charges people face when trying to make the most of the pension freedoms.”