Exit penalties for over-55s wishing to exercise the pension freedoms will be capped at one per cent of the value of their fund, under new proposals by the regulator.
The cap will apply to existing contracts for personal, stakeholder and self-invested personal pensions, but not occupational pensions, where exit fees are subject to a separate consultation. With-profits funds, however, which can apply ‘market value adjusters’, are not covered.
Exit fees are already outlawed on all new pension contracts.
But anyone expecting the cap to kick in automatically could be disappointed. David Smith, financial planner at Tilney Bestinvest, said: "Providers will cite the fact that the pensioner will – or should – have known about these charges from day one and that early exit charges would apply. Should the proposals gain pace there will no doubt be challenges from providers, protracted battles, and even court cases."
Mr Smith added: "A blanket ban on exit fees over one per cent may therefore be a lot more difficult to impose than expected. So, if you’re one of those impacted by such fees, I wouldn’t hold your breath on the cap being imposed any time soon. As much as it is galling for a saver to see their pension fund hit by what could amount to thousands of pounds in charges just before retirement, there may in fact be valid reasons as to why these are levied."
Tom McPhail, head of retirement policy at Hargreaves Lansdown, welcomed the move but said the government had given in to industry pressure. “The fee should be capped at 0per cent and this would benefit a further 150,000 investors. A one per cent cap is something of a victory for corporate vested interests.”
Mr McPhail went on: “The cap also only applies to those exercising the pension freedoms. Those wishing to transfer old, expensive private pensions to improve their value for money, while they are still building their savings, will not benefit from the cap. This penalises those who are doing the right thing by saving but are hamstrung from making competitive choices which would help their hard earned money work much harder.”
Investors may also have to wait until March 2017. The FCA has yet to confirm that anyone wishing to transfer from today's date can have a guarantee that they can reclaim any charges.
Hargreaves is also lobbying for a “seven-day switch guarantee” for investors who transfer from one pension to another.
Its research this week found pension account switch times have fallen from an average of 50 days a few years ago to 11 days, but average transfer times from occupational schemes are still 39 days.
Mr McPhail said: “Pension transfers are far faster and more efficient than they were in the bad old days. However there is a risk that this progress is stalling and that consumer confidence could be undermined by uncertainty over how long the process takes. The pensions industry should work together with policymakers to establish a seven-day pension transfer guarantee.”
He added: “Where advice is required, or there are non-standard pension assets, then delays may be appropriate, in part to protect consumers. However, the vast majority of pension transfers are simple transactions, no more complicated than switching a bank account and should take no longer than a week to complete.”
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