Pension exit fees: younger people charged extortionate sums for moving their savings
A loophole in the Government’s cap on pension exit fees means younger people with pension savings face hefty charges if they want to move.
A large group of younger savers who have already started saving for retirement, won't benefit from the pension exit fee cap.
Back in April, the Government banned exit fees on all new pensions and imposed a 1% cap on exit fees for the over 55s. The aim of this move was to allow older people to access their cash in the wake of the new pension freedoms without being penalised by their pension provider.
However, it's emerged that younger savers who started saving before the cap came into play have been overlooked and could face exorbitant exit penalties if they want to move pension pots to new providers.
Unreasonable charges
The issue has been highlighted by the case of Russell Jones, 36, who told ThisisMoney how he was forced to abandon plans to consolidate his pensions into one pot when Friends Life said he would face a 78% exit penalty if he moved the pension savings he had to another provider.
The ludicrous exit penalty would have left Mr Jones with just £138 from a £615 pension pot if he went ahead with the transfer.
Aviva, the pension firm that owns Friends Life, stated that exit penalties are high for younger savers as some pensions were structured so that early premiums paid the set-up, administration and advice costs of funds that were designed to run for 30-40 years until someone retired.
“We make it clear in our policy documentation that, in order to gain maximum benefit from a pension, it should run its full term until the selected retirement age, and if the transfer value is taken during the very early years it is likely to be less than the amount paid in,” Friends Life said in a statement.
Why do we have exit fees?
Exit fees were originally created on pensions to help firms cover their costs with old-style insurance company-based pension plans. The idea being that the exit fee covers the commission paid to the salesperson and the set-up costs of the policy. That money is usually covered by an annual management fee, but if you decide to withdraw your cash early it is recouped through the exit fee.
Up until the Government ban, exit fees were still being routinely written into pension terms and conditions despite the fact most pension policies now are not insurance-based, instead your contributions are invested in funds, so the set up costs are lower.
Should the cap be extended?
The problem is that the Government only put a cap on existing pension exit fees for the over-55s. It was focused on making sure this age group could access their pension savings without penalty as part of the pension freedoms introduced in 2015 to give people more control over their retirement income.
But it has left younger savers stuck unable to move pension funds in order to consolidate them until they are at least 55.
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Thinking of transferring out of your pension? Read this first
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