Pension exit charges save people from themselves

Only a third could hold out for the extra reward, and among younger children the proportion was even tinier.

The experiment tapped into a universal human trait – the appeal of something now will outweigh the appeal of an obviously better reward for which we are made to wait.

While children were the subjects, this same attitude is always there, underpinning and undermining our decision-making all through our lives.

This same attitude is always there, underpinning and undermining our decision-making all through our lives

Bearing this in mind, and with the nation facing the huge shortfall in retirement saving that it is, we should probably be making it as difficult as possible for people to cash in now at the expense of the future.

But instead, the FCA has declared it will cap all pension transfers at 1 per cent, and ban exit charges completely on new schemes. Currently the proposal applies to the over-55s, but the regulator has not ruled out revisiting the policy to look at other age groups in the future. It even talks about this recommendation “discriminating” against under-55s.

Announcing the move, Christopher Woolard, the FCA’s director of strategy and competition, said, “This is an important step so people feel able to access their pension savings should they wish to.”

If you ask me, we should be doing the opposite, and doing whatever we can to deter people from accessing their pension savings, however much they wish to.

I know it is their money and all that, and transparency and accessibility are admirable ideals to which to aspire, but sometimes, people need saving from themselves.

Initiatives like auto-enrolment have just begun to have an impact in cajoling the masses to do something to prepare for their retirement.

This move will enable, if not encourage them to undo all that good work.

As long as all barriers are removed at retirement date, I don’t think it is that wrong to maintain those barriers until then, and try to ensure a healthier pot at retirement

Quite apart from the behavioural science behind exit charges, they serve a practical purpose for providers. Many older schemes have a higher exit fee that acts as a makeweight for low admin charges.

If new pensions are to have exit fees banned completely management charges will inevitably have to rise to make up the shortfall. Unless the FCA acts to cap those too, in which case margins will be squeezed to the point where there will be little incentive for institutions to offer pensions at all.

Also, the 1 per cent figure feels problematic to me, as if it is a number plucked out of the air because it sounds cheap, rather than a limit calculated to be viable. It may be no coincidence that it was the same limit placed on stakeholder charges way back when.

But that cap, when combined with enabling savers to switch providers without any penalty, was key to the major flaw with stakeholder pensions.

Those firms offering the schemes could not guarantee they would take enough cash to cover the expense of administration, which is naturally skewed towards the outset of a policy by set-up costs.

It is an extreme example, but conceivably policyholders who had paid 1 per cent of £25 for three months could then take their business elsewhere having contributed 75p towards the cost of setting up and transferring out of the scheme.

Even if the 1 per cent figure is scientific, you wonder where the consistency is with government policy, when the recently launched Lisa carries an effective exit penalty of 20 per cent, ostensibly to deter people from cashing that in before they need to.

Ultimately of course, we should be educating the public about the impact that early encashment will have on their retirement, but that will take generations.

Until then, if the government and regulator are serious about closing the savings gap, they should do what they can to take temptation out of the way and help us all towards an abundance of marshmallows in the future.