Postpone retirement for a year to avoid pension rip off, experts warn
The government has announced that it will introduce a cap on rip-off pension fees in March 2017. The announcement has led the experts to warn older people that it may mean they need to postpone retirement for a year, in order to avoid a pension fee rip off.
The cap
New rules from the FCA will limit the amount that companies will be allowed to charge people who want to take advantage of new pension freedoms - and withdraw cash from their pension. They have not set the cap just yet, but will confirm the details shortly.
FCA figures recently showed 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. 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). Meanwhile 62,000 people have faced penalties of 40% or more of their entire pension fund.
These aren't new fees brought in by the pension companies in order to stop people using pension freedoms, but are a legacy from past decades, when the fees were written into the contracts to stop people leaving early.
What should you do?
The axing of rip off 'exit fees' will mean some savers pay thousands of pounds less in fees, and the experts have suggested that if you plan to take advantage of pension freedoms to withdraw cash, it may mean it's worth staying in work until March 2017, so you can take advantage of the new cap.
Nathan Long, Head of Pension Research at Hargreaves Lansdown, says anyone set to retire before March 2017 and planning to use pension freedoms should get up-to-date statements and take stock. For a start, this will help you understand the effect of recent market movements on your pension pot - which may impact your decision as to whether or not to withdraw lump sums.
You also need understand the costs of exit. Long explains: "If you have an early exit penalty, work out when it naturally comes to an end. The FCA can cap charges, but looks unlikely to remove them entirely. Anyone who is very close to the point when they can take their pension without penalty may want to simply wait patiently."
If it makes sense to postpone taking your pension, he highlights: "Accessing pension plans does not necessarily go hand in hand with finishing work." He says there are plenty of options to consider: "Will you move part time, or access some of your pension whilst still working? Do you need to delay or change your investment strategy? You can then create a plan of which pensions you need to access and when, this can help to avoid using any plans whilst they have an early exit charge."
If in doubt, he adds, this may be the time you could benefit from taking advice. It comes at a cost, but retirement is often uncharted territory, and you may not know about all the potential options - let alone understand them - so it may pay to get some help.
