Government clampdown on pension exit fee rip offs

George Osborne visit to Cardiff

The government has announced a clampdown on excessive exit fees being imposed by pension companies when people take advantage of new pension freedoms. The move will make retirement less expensive for thousands of people overnight.

Some companies have been imposing exit fees on people who want to take advantage of new pension freedoms. The fees kick in when they withdraw cash from their pension after the age of 55, or transfer to a pension that will enable them to do so. In some cases pensioners ended up paying thousands of pounds in fees.

The fees

Research from the FCA in 2015 found that although 83.6% of firms didn't impose exit fees on customers aged 55 and older - 700,000 people still faced exit fees of some sort.

Some 8.8% of pension firms charged up to 2% of the value of the fund, 4% charged between 2% and 5% of the fund value, 2% charged 5%-10%, and 1.6% charged more than 10% of the value of all the cash in the pension.

And while these charges amounted to less than £250 for 9.2% of people, they came to more than £1,000 for 2.6% of people (870,000).
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The crackdown

The government started consulting on these fees back in July last year, when reports emerged of people facing thousands of pounds in fees.

George Osborne has now announced plans to cap them. He said: "We've listened to the concerns and the newspaper campaigns that have been run and today we're announcing that we will change the law to place a duty on the Financial Conduct Authority to cap excessive early exit charges for pension savers. We're determined that people who've done the right thing and saved responsibly are able to access their pensions fairly."

"The Government isn't prepared to stand by and see people either ripped off or blocked from accessing their own money by excessive charges."

What next?

The government will push through the legislation, and then it will be up to the FCA to set the maximum level of fees allowed - which it will consult on first.

Tom McPhail, Head of Retirement Policy at Hargreaves Lansdown welcomed the announcement, saying: "We hope that all pension investors will now be able to exercise free control over their pension pots. Any exit penalties should be limited to no more than a proportionate administration charge based on the actual costs incurred."

He added that anyone wanting to take advantage of the new freedoms - who feels their provider is charging excessive fees - may want to wait for the change - although he accepts: "It is unclear at this stage how rapidly the change can be introduced."

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Government clampdown on pension exit fee rip offs
Given the number of shocking headlines about pensions over the years, you'd be forgiven for thinking that pensions are a mug's game. For many people, the pensions mis-selling scandal is fresh enough in the memory to put them on their guard. If you add in the Equitable Life debacle, the scandal of high charges on some of the older pensions products, and Gordon Brown's 'tax raid' on pensions, you'd be forgiven for thinking the reputation of the pensions industry was tarnished beyond repair, and you'd be better off with a shoebox in the wardrobe. However, even despite all of these problems in the past, pensions still retain ample attractions. They are one of the most tax-efficient ways to save for your retirement, and should feature in everyone's broad plans for retirement.

This was a particular refrain prior to 2007, when pensions were suffering endless scandals and the price of property seemed to be on an endless upwards trajectory. The subsequent stuttering of the property market has made many people reconsider, but you will still find those who think that their property is going to keep them in retirement.

There are many ways it can help. If you have an investment property, the income from renting it out could help supplement your income in retirement. Alternatively some people may be able to release equity or downsize and use the excess to boost their income.

However, none of these things are guaranteed. House rental carries the risk of void periods and the cost of maintenance and management. Meanwhile there's no guarantee you will make the money you expect from downsizing (especially if house prices fall), or that you will be able to do it easily when the time comes. Finally, equity release is an option, but will erode the total value of your property during your lifetime, which needs to be properly communicated to your family.

Pensions are fantastically tax-efficient. If you are a basic rate taxpayer, then for every £80 you invest, the government tops up up with £20 in tax relief. For higher rate taxpayers for every £60 you invest, the government adds £40, and for top rate taxpayers, for every £55 you invest the government adds £45. Much of the growth inside a pension is also free of tax, which gives your pension pot the best possible chance of gaining in value. However, pensions are not tax free. When you take the money out at the other end, you will pay tax. If you buy an annuity you will pay income tax at your marginal rate on the income, and if you take it out as a lump sum (after the first 25% which is tax free), you will also pay tax on it at your marginal rate.

There gave been some horrible high-profile examples of businesses which have found themselves unable to make good on their pension promises. People who thought their retirement income was safeguarded have found their income dramatically reduced. In some instances this is where the company has gone to the wall with an underfunded pension. The Pension Protection Fund will kick in to help people in these schemes, but although those who have already reached retirement will get 100% of their benefits paid, for those still working, only up to 90% will be  paid, and in some cases much less.

The vast majority of people aged under 30 haven't spared a thought for their pension. They may have been auto-enrolled at work, but other than that they're far more likely to be focusing on paying off debts or saving for a property, rather than saving for something that they won't need until forty years down the track. However, the experts highlight that the earlier you start saving for retirement, the less you have to put aside each month, the more you will retire on, and the simpler and more painless the process will become. If you leave pension planning until your 40s you will face the unpleasant choice between putting an uncomfortable amount of money aside every month, staying on at work later than you had planned, or retiring on a lower income.
On one level this is true. In a bank account, as long as the bank remains strong, you cannot lose your cash. Even if it goes under, the first £85,000 you hold with each UK institution is covered by the Financial Services Compensation scheme. However, there are two factors you also need to consider when you decide to put long-term savings into a bank account. The first is that in some cases the interest you're being paid on your account, minus the tax you pay on interest, means the growth of your cash isn't keeping pace with inflation - so you're effectively watching the spending power of your cash erode. The second factor is the opportunity cost: by opting for cash you are missing out on the potential for extra growth in other types of vehicles such as share-based investments. These will not be suitable for everyone - particularly if they need the money in the short to medium term, or they are a particularly low risk individual. However, for everyone else it should be part of your considerations.
In some instances this is true. If, for example, you pay your utility bills by direct debit, you will usually get a significant discount for it. However, you shouldn't fall into the trap of believing this is always true. If, for example, you pay for your car insurance by monthly direct debit rather than in an up-front lump sum, in most cases you will pay interest on the outstanding amount. Meanwhile, if you push payments onto direct debit you have to make a commitment to review them every year - to ensure you're not still paying for things you don't want or need.
There are some good reasons for borrowing money. Most people have to borrow for major purchases such as a car or a house: saving up to buy one outright is not always practical. You may also need to spread the cost of a sudden and unexpected expense - and careful money management should enable you to do this while paying little or no interest. However, equally, there are terrible reasons to borrow. If you are regularly spending more than you earn, so going into debt earlier and earlier in the month for essentials, then you're building a major debt headache. Likewise, if you know you cannot really afford something, but credit gives you the option to have it anyway, you're going to pay for that decision later.

Widespread adverts for IVAs have made this myth fairly widespread, but they have significant consequences, so should only be considered in very serious circumstances.  If you have approached a debt charity to talk through the options, and you decide that an IVA really is the right solution, it will blight your credit record for the next six years, making it very difficult for you to do things like get a mortgage. Landlords and employers will also be able to check your credit record for IVAs and bankruptcies, so it could affect your housing and employment prospects too.

This is just an excuse - and usually one people make when they are admitting to having run out of cash, missed bill payments, or built up debts. Nobody is actually 'hopeless': they're confused, disengaged, or too busy thinking about other things, but all these things are curable. We all have a calculator and the ability to write down what we spend: so we all have the skills we need to budget. We just have to give up the lazy excuses and get stuck in.
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