Firms will not be able to apply any exit charge for personal pension contracts entered into after the proposed new rules come into force.
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).
Analysis by the FCA suggests that capping early exit charges would result in increased numbers of eligible consumers accessing the freedoms in the next four years, which could benefit more than 747,000 people.
Existing contracts with early exit penalties below 1% will not be able to raise their rates under the FCA’s proposal.
Target audience
The changes will be of particular interest to consumers with personal pensions who, after the new rules come into effect, face early exit charges when they wish to access their pensions savings at, or after, age 55 but before their expected retirement date.
The FCA acknowledged that the proposal “discriminates against the population under age 55 who may wish to transfer their pensions early”.
The regulator has not ruled out other policy initiatives for other age groups at a later date.
The consultation, which closes on 18 August 2016, follows chancellor George Osborne announcement in January 2016 that the power to cap excessive early exit charges was to be handed to the FCA.
Undeterred
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,” he said.
The FCA will be given both the power and duty to cap exit fees by parliament once the relevant section in the Bank of England and Financial Services Act 2016 comes into force. This aims to ensure that consumers can access the government’s pension reforms easily and affordably.
Inconsistent
Not everyone, however, is impressed by the latest in a series of proposals on exit charges, with AJ Bell’s marketing director Billy Mackay saying: “Some would say that the irony and inconsistency in these proposals is interesting. Capping early exit fees on pensions is a welcome development and will lead to better outcomes for thousands of pension savers.
“However, on the one hand we have a proposal to set early exit fees on pensions at 1% and at exactly the same time a proposal to introduce an early exit penalty on Lifetime Isas of 5%. Any charge simply to access your own money is unfair. Charges should be applied by providers in a way that allows them to be related to the work the provider needs to carry out for the customer in return for that charge.”
Not far enough
Tom McPhail, head of retirement policy at Hargreaves Lansdown, says: “Exit penalties on out-dated pension contracts have absolutely no place in the modern pension savings system. Capping these fees will provide significantly better choices for investors wishing to use the pension freedoms.
“However, this cap does not go far enough. The fee should be capped at 0% and this would benefit a further 150,000 investors. A 1% cap is something of a victory for corporate vested interests. We hope that the cap can be brought up to a zero tolerance of exit barriers in due course.
“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,” McPhail says.
