Cap on pension exit fees ‘still too high’

The watchdog has placed a limit on pension withdrawal fees but critics say savers will still be overcharged.

The Financial Conduct Authority (FCA) has announced that pension companies must stop charging “extortionate and unreasonable” exit fees to savers who want to access their money.

Under new rules coming in from March 31 2017 pension firms will not be able to charge savers more than 1% in exit penalties.

New pension arrangements started after that date will be free of all exit penalties and existing schemes with exit fees below 1% will be barred from raising them.

These are significant changes, as some firms currently charge as much as 40% in extreme cases.

But while the cap has been welcomed, critics have pointed out that a 1% charge could still see some customers handing over thousands of pounds just to access their own money – despite the fact it costs pension firms as little as £50.

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Background to pension exit fees

Early exit fees are typically charged when a pension saver aged between 55 and 65 tries to withdraw or transfer their retirement savings.

According to data from the FCA, 2.2 million savers have early exit fees in the terms and conditions of their pensions.

As a result almost a million people aged over 55 would have to pay to access their own pension pot.

Exit fees have become particularly contentious since the new pension freedoms came into effect last year.

Millions of people now have the freedom to choose how they turn their pension pot into an income, but many faced hefty exit fees if they want to move their money.

“People eligible for the Government’s pension reforms should feel able to access them as they wish,” says Christopher Woolard, executive director of strategy and competition at the FCA.

“The 1% cap will mean that savers will not be deterred by these charges from accessing their pension pots.”

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“Step in the right direction”

Nathan Long, senior pension analyst at investment firm Hargreaves Lansdown, described the cap as a “huge step in the right direction”.

He adds that there are 147,000 people aged over 55 facing exit penalties of over 5% who will be “relieved that they are now able to transfer to a more modern pension now the shackles have been released”.

The Association of British Insurers (ABI) has defended the charges saying most people are unaffected by them.

“The industry is strongly supportive of the pension freedoms and has worked hard to make them a success,” says Dr Yvonne Braun, director of policy for long-term savings and protection at the ABI.

““More than eight out of 10 customers are unaffected by early exit charges. Where they do apply, most fees are 2% or less and would have been put in place many years ago.”

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Critics want lower charges

However, some industry insiders think the FCA hasn’t gone far enough as a 1% fee could still cost some savers thousands of pounds.

“1% could still be a chunky sum to lose from your pension at the point of retirement,” says Long, who warns savers to make sure they check what fees they’ll be charged before they decide what to do with their pension funds.

“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,” says Tom Selby, senior analyst at AJ Bell.

“The pension freedoms are now well established yet there are still thousands of people that are going to have to pay thousands of pounds to access them.”

Charity Citizens Advice adds that the fee is particularly galling because it doesn’t reflect the actual cost of allowing people to access their cash.

“A £50 cap would have been preferable – as that covers the cost to a provider of actually exiting your pension,” says Gillian Guy, chief executive at Citizens Advice.

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