Proposals to cap pension early exit charges at 1%
Plans to clamp down on early exit charges for people using new pension freedoms have been set out.
The Financial Conduct Authority (FCA) has proposed that exit charges should be capped at 1% of the value of the pot.
Early exit fees may be charged when someone transfers or takes their pension benefits after the age of 55 but before their selected retirement age.
The proposals apply to existing contract-based personal pensions, including workplace personal pensions. The FCA said firms will not be able to apply any exit charge for personal pension contracts entered into 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."
Introduced last year, the new freedoms give people aged 55 and over a wider range of choices over how they use their pension pot, rather than being required to buy a retirement income called an annuity.
But concerns were raised that high charges were acting as a barrier to some people using the freedoms how they wanted.
The Department for Work and Pensions has also launched a consultation to prevent people in occupational schemes facing exit charges for accessing their pensions early. The consultation closes on August 16.
Chancellor George Osborne said: "Nearly quarter of a million people have already taken advantage of the Government's pension freedoms, accessing their money when it suited them. I want everyone to have the same opportunity, including people who are eligible but currently face some sort of early exit fee.
"And I am clear that people who've done the right thing and saved responsibly should be able to access their pensions fairly. They shouldn't face prohibitive charges that block them from exiting their current deal."
Mr Osborne continued: "I am pleased that the FCA plans to cap exit fees at just 1% for current pension holders and ban them from future contracts altogether."
Previous FCA investigations have found that 670,000 consumers aged 55 or over faced an early exit charge. Of these, 358,000 faced charges up to 2%, 165,000 faced charges between 2% and 5%, 81,000 faced charges between 5% and 10%, and 66,000 faced charges above 10%.
The FCA is being given the power and duty to cap exit fees by Parliament. It aims to put the cap in place by March next year.
Pensions minister Baroness Altmann said: "These changes are about giving everyone who has worked and saved hard for their retirement a fair deal by removing the final barriers to the pension freedoms. I encourage the industry and all those with an interest to contribute to this debate.
"I urge people to continue to work hard, plan and save for their future, and we will continue to reform the pension system so that it delivers for them."
Alex Neill, director of policy and campaigns at consumer group Which?, said: "It's right that the FCA is bringing in this cap on pension exit fees.
"People shouldn't be unfairly penalised for accessing their money. This announcement is a good first step and the regulator must now turn its attention to other charges people face when trying to make the most of the pension freedoms."
Gareth Shaw, head of consumer affairs at Saga Investment Services, said: "The FCA's proposals are in the best interests of consumers. It is completely unfair that someone who has saved diligently is penalised for wanting to get their hands on their own money."
Tom McPhail, head of retirement policy at Hargreaves Lansdown, said: "Exit penalties on outdated 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%."
Yvonne Braun, director of policy, long-term savings and protection at the Association of British Insurers (ABI), said: "More than eight out of 10 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 and choice reforms were introduced."