Excessive charges are halting thousands of pensioners who want to take advantage of pension freedoms. The government admitted in January that 700,000 people faced charges of some sort, but for some pensioners, these charges are overwhelming. New figures from the Financial Conduct Authority have revealed that 4,000 pensioners face fees worth 40% or more of their pension pot if they want to free up the cash - so they could see their savings almost halved.
The freedoms - which have been in place for a year - were meant to ensure that people could use their pension savings in any way they chose. They could continue to buy an annuity, enter into income drawdown, take a series of lump sums, or they could take the lot in cash.
Figures from the ABI have found that in the year since freedoms were introduced, £3 billion has been paid out in 213,000 lump sums, and £2.9 billion as been paid out through income drawdown payments.
However, many thousands of people who investigated the possibilities open to them under the new rules, immediately ran into the kinds of charges that scuppered any chance to enjoy pension freedoms.
The FCA found that 17,000 people faced fees of between a fifth and two fifths of their pension pot when they tried to access the cash. Meanwhile, 45% of people faced fees of between 10% and 20%. Some 81,000 were charged fees of between 5% and 10% of their pension pot, and 165,000 were charged between 2% and 5% of the pot.
Tom McPhail, head of retirement policy at Hargreaves Lansdown says: "In some cases these penalties can run to hundreds or even thousands of pounds. This kind of financial bondage has no place in the 21st century."
If they tried to access this cash before the age of 55, many thousands more faced impossibly high fees - with 58,000 charged more than 40%. This is only to be expected, however, as pension freedoms are only intended to enable people to access their money after the age of 55.
On the plus side
The good news is that the vast majority of people either faced no access fee - or less than 2% - accounting for 3.4 million people - and for the many thousands of people still left out in the cold, there is hope.
George Osborne has asked the FCA to consult on exit fees, and impose a cap on the maximum charges that pension companies are allowed to levy. He said: "We will change the law to place a duty on the Financial Conduct Authority to cap excessive early exit charges for pension savers." And: "The government isn't prepared to stand by and see people either ripped off or blocked from accessing their own money by excessive charges."
The bad news is that this consultation is going to take a while, and the only promise the Treasury has made is that this cap will be introduced by the end of March next year. McPhail says that those who have the freedom to put off their retirement - or drawing a pension - may want to wait until the cap is in place if they want to take advantage of pension freedoms.
Of course, those who don't have this flexibility are left with a choice of paying thousands of pounds in penalties, or giving up their pension freedom ambitions.