Since new pension freedoms were introduced last April, the concept of a selected retirement age for a pension has become less relevant.
It was good to see the Financial Conduct Authority (FCA) announce the level at which it will consult to cap early exit charges for consumers who wish to make use of these pension freedoms.
The regulator is proposing that, for existing contract-based personal pensions, exit charges will be capped at 1% of the value of the pension pot.
This will also apply to workplace personal pensions.
Pension providers will not be able to apply any exit charges for personal pensions which are started after the proposed new rules come into force.
Christopher Woolard, director of strategy and competition at the FCA said:
“Together with the ban on exit fees in future contracts, we are proposing a 1% cap on exit charges in existing contracts to ensure people can access their pension pots without being deterred by charges.
“This is an important step so people feel able to access their pension savings should they wish to.”
Parliament will give the FCA the power and duty to cap exit fees on pensions once the relevant section of the Bank of England and Financial Services Act 2016 comes into force.
This Act aims to ensure that consumers can access the government’s pension reforms easily and affordably.
Related to the FCA consulting on the 1% cap on pension pot exit charges was the news that the Department of Work and Pensions is consulting on capping early exit charges for members of occupational pension schemes.
In response to the FCA’s announcement that early exit charges on pension pots will be capped, the Association of British Insurers highlighted that many consumers pay zero or very low exit charges as things stand.
Dr Yvonne Braun, Director of Policy, Long-term Savings and Protection at the ABI, said:
“More than eight out of ten customers do not have to pay early exit charges to access their pensions, as the FCA has acknowledged.
“Where they do, most fees are 2% or less and were put in place decades before the Freedom & Choice reforms were introduced.
“The ABI will engage closely with Government and the FCA on the consultations.”
One of the FCA Treating Customers Fairly outcomes, which have been in force for over a decade, is that consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.
By consulting on a 1% cap on early exit charges on pension pots, and banning pension providers from applying any early exit charges on new pension contracts, the FCA will effectively rule what is unreasonable in terms of a post-sale barrier.
Here at Informed Choice, we believe this is a positive move which will allow people to more readily access what is their own money, without being penalised for taking income or cash in retirement under the pension freedoms.