Last week (26 May), the regulator proposed for existing contract-based personal pensions, including workplace personal pensions, exit charges will be capped at 1 per cent of the value of a member’s pot.
The consultation on capping early exit pension charges also stated firms will not be able to apply any exit charge for personal pension contracts entered into after the new rules come into force.
The majority of providers Financial Adviser spoke to following the announcement of the proposed cap stated the bulk of their pension contracts had exit fees of less than 1 per cent.
But several admitted they do still have a small number of contracts with exit charges of a greater amount meaning they will now have to assess the impact of the cap being set at this level.
An Aviva spokesperson stated while the vast majority of their pensions do not carry any early termination charges the provider had introduced a 5 per cent cap on the small proportion of pension policies that carried charges above that amount.
Aviva’s spokesman said the provider will now consider the FCA’s proposals and respond to the consultation.”
David Lascelles, head of propositions at Scottish Widows, said his business has removed exit fees across workplace pensions and is now reviewing the exit charges on individual pensions.
He added only a very small proportion of Scottish Widows’ personal pension customers pay an exit charge above 1 per cent, so the financial impact will be small.
Mr Lascelles said: “These fees are largely associated in the industry with older style products and reflect expenses already paid by a provider in setting up the policy, which would normally be paid back if the saver stayed in the scheme to their retirement date.
“But with pension freedoms enabling people to access their money earlier than they had originally expected, we believe these fees place an unnecessary barrier on those wishing to take their money or move to a more modern product either with us or another provider.”
A spokesman for Zurich pointed out early exit charges were not a source of profit for the provider.
He said: “However, as the FCA acknowledges, the introduction of a cap will carry a financial cost for providers.
“Our pension charges are set out in the terms and conditions of customer contracts.”
Jamie Jenkins, head of pensions strategy at Standard Life, said they were one of the first to cap exit charges.
He said: “Fewer than 7 per cent of Standard Life’s pension customers have exit charges and, for those that do, the average is less than 1 per cent; so it has limited impact.
“Exit charges largely relate to small number of historic contracts so we do not anticipate any change in pricing for new pensions.”
A spokesperson at Prudential said for the vast majority of Prudential UK’s personal pension customers there is no early exit charge when accessing their pension fund and for our workplace pension customers we also recently announced the removal of exit charges.
“We look forward to working closely with the FCA to fully understand the impact of the proposal to cap exit fees on personal pensions at 1 per cent.”
Steven Cameron, pensions director at Aegon, called exit charges “a hangover from legacy charging structure designs” and stated they have no place in modern pensions.
He said: “Capping exit charges may encourage more individuals to access the new freedoms. In our experience, a greater barrier is the tax charge of up to 45 per cent if the individual is considering a lump sum.”
David Smith, director of financial planning at Tilney, said 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 these are levied.
He said: “Obviously, there are instances when the fee is not so justified; instances whereby a provider will charge simply because they are missing out on future annual management charges, or a saver is paying for the commission takings of a broker.
“Each individual case should be viewed on its own merits, reviewing whether the penalty appropriate or over and above what could be justifiably levied?”
ruth.gillbe@ft.com
