Crackdown on 'rip-off' pension freedom fees

The government plans to introduce a cap on pension exit fees, to stop pension companies fleecing people who want to take advantage of the new pension freedoms. At the moment, some of the most punishing fees can hit 20% of the fund's value, but David Cameron has announced a review of the market.

The problem emerged after the radical changes to pension rules, designed to allow people over the age of 55 to be able to dip into their pensions savings whenever they like - and take as much or as little as they want. There has been increasing disquiet as to how much pension firms are charging people to take advantage of these new freedoms - which can cost people £10,000 or more.

The consultation will ask whether the government should step in, and introduce a cap on fees. It will also look into how easy it is to transfer pensions, and whether there needs to be greater clarity around financial advice. Cameron said: "We want to ensure that pension providers are not using exit charges and restrictions as a barrier to switching just when the Government is providing pensioners with greater freedoms."

He has not said what the cap would be, and he is not expected to do so until after the consultation. However, industry experts estimate it's likely to be around 2.5%.

Patrick Connolly, a certified financial planner with Chase de Vere, said the move was a good idea, explaining: "While only a relatively small number of pension policies impose excessive penalties, these need to be eradicated entirely if we want to continue to build public trust in pensions."

Paul Green, director of communications at Saga, agrees: "We are pleased that the Government is taking action.... People haven't saved all their lives to have it snatched away by pension firms just as they are given the freedom to do what they want with their own money."

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However, Connolly wants to see the government be more proactive. He explains "While it is pleasing that this issue is being addressed, it is important to note that exit penalties on pensions don't just apply to those over age 55 or those using pension freedoms. Many other people are trapped in poor value pensions and yet face high exit penalties if they want to move elsewhere. A charge cap on pension withdrawals or transfers is a sensible idea, but this should apply to all pension products and not just where pension freedoms are being utilised."

TUC General Secretary Frances O'Grady agrees, saying: "Action to clamp down on unreasonable fees and charges should not be limited to pet government projects such as its so-called pension freedom. We know that £26 billion of pension savings are locked away in legacy pension accounts with high fees and complex charging structures. But the pensions industry and government have failed to act robustly."

She adds: "All savers should be confident that their hard-earned savings will give them a decent income in retirement without large amounts being skimmed off in unjustifiable expenses."

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