If someone told you it would cost you £3,000 to change the tyres on your car you would be disgusted.
If your car were a Formula One racer and the new tyres were one-of-a-kind and meant you could win every Grand Prix going this year then suddenly that price tag seems like the bargain of a lifetime.
Last week we had the Financial Conduct Authority and Department for Work & Pensions propose exit fee caps for retirement savings pots.
The FCA and DWP papers came after earlier this year the government expressed their concerns over pension savers being hit by substantial exit fees when they wished to open up their savings pots to take advantage of pension freedoms.
The FCA consultation paper proposed a 1 per cent exit fee cap for those over the age of 55.
So, should the regulator be patted on the back for this proposal?
Exit charges shouldn’t be penal – it is wrong to charge in excess of 30 per cent of a fund’s value if it costs far less than this to release the pension pot early.
But is it right to dictate the maximum an exit fee can be is 1 per cent?
Is it right to dictate the maximum an exit fee can be is 1 per cent?The charge may simply be an administration fee for closure, some savers may be invested in with-profits funds which impose a market value adjuster (which isn’t included in the DWP’s proposed cap for occupational pension pots) for funds withdrawn during periods of market uncertainty, there may be a charge to recoup added benefits provided at the outset of the plan, or in some cases they may be incurred to repay commission taken by an adviser.
These charges can vary in terms of severity, often depending upon the provider involved.
Mr Smith notes many legacy policies were established with high allocation rates; so for every £1 contributed to a pension plan, amounts of up to £1.15 were invested into the plan.
In return, the provider would recoup this extra allocation by taking charges up to the stated retirement age.
If retirement or a transfer took place before the expected retirement age, a penalty would be incurred to reflect the fact that a shorter policy term would not have enjoyed such a high initial allocation.
Ultimately as much as it is galling for a saver to see their pension fund hit by what could amount to thousands of pounds in charges just before retirement, there may in fact be valid reasons as to why fees are levied.
What is needed is for the FCA to probe how providers justify their exit charges.
Otherwise, we will have certain providers simply renaming exit charges as something else in order to get round this cap.
