Almost half of all financial advisers have clients prevented from accessing the new pension freedoms due to early encashment penalties, according to an AJ Bell survey.
At its Investival conference in November, the firm polled 114 advisers, finding that 45 per cent have clients who have been subject to pension exit penalties.
For about half (24 per cent) of these advisers, around 5 per cent of their clients have been affected by penalties.
Additionally, 14 per cent of advisers said either 10 or 15 per cent of their clients have been prevented from accessing the pension freedoms because of exit penalties and 7 per cent said at least 20 per cent of their clients were in this position.
Roughly what proportion of your clients have been prevented from accessing the new pension freedoms due to early encashment penalties? |
| |
None | 63 | 55% |
5% | 27 | 24% |
10% | 9 | 8% |
15% | 7 | 6% |
20% | 5 | 4% |
25% | 1 | 1% |
more than 25% | 2 | 2% |
Total | 114 | 100% |
Billy Mackay, marketing director at AJ Bell, said early encashment penalties getting in the way of advised clients making the most of pension freedom “feels wrong” as it fundamentally goes against the spirit of flexibility and choice.
He said: “The problem with some early encashment charges on older pension contracts is that there is no obvious link between the charge and the work required by the provider to make the transfer.
“The main reason given for exit fees is to cover initial costs, but you have to question whether it is reasonable to still be collecting charges for events that may have happened around a quarter of a century ago.”
He also questioned whether some exit fees really do relate exclusively to initial set up costs, or whether they are actually about on-going provider profitability.
Mr Mackay said: “In reality the charge was baked into the contract many years ago to ensure the provider made the requisite amount of money out of the product.”
AJ Bell’s figures follow the Financial Conduct Authority’s pension freedom data collection exercise, published in September, which showed 84 per cent of consumers aged 55-years-old or more did not experience any exit charge.
Of the remainder, the FCA found around 9 per cent would face a charge of 0 to 2 per cent, while 4 per cent would face a charge of 2 to 5 per cent and around 3 per cent of over 55s would face a charge greater than 5 per cent.
AJ Bell called for exit fees to be reviewed and made relevant to the work carried out by the provider today and set at a reasonable level.
Mr Mackay said: “I’d expect early encashment penalties to be examined very carefully by the regulator in 2016 and providers could come under significant pressure to cap them or remove them completely.”
David Trenner, technical director at Intelligent Pensions, said while he agrees with the gist of the argument, “the fact is, insurers needed to pay more commission back in the 1980s and 1990s to get business, which required back end charges”.
He added that providers are perfectly entitled to make ongoing profit and that this was the sort of soundbite that politicians would use to score points.
Barnett Waddingham senior consultant Malcolm McLean said that even faced with that argument, the fact remains that trapping savers in poor value pension arrangements by forcing them to face hefty exit charges under, often unfair and unreasonable contract terms, is not acceptable in today’s world and should be curtailed without further delay.
“If providers are not prepared to accept some form of voluntary amnesty on the levying of exit charges the government and the regulator must surely act on behalf of consumers using whatever statutory powers are available to them.
“At the very least naming and shaming of the worst offenders should be a requirement.”
Tom McPhail, head of retirement policy at Hargreaves Lansdown, added exit penalties should be no more than a proportionate administration charge, which in most cases will mean perhaps £20 or £30.
He said: “We hope the government will intervene to curtail the most egregious cases of exit penalties; there is no longer any justification for charging several per cent of an investment account before letting your customers out of the door.”
peter.walker@ft.com
