What effect will a cap on exit fees have on freedom and choice?

In fact, the Financial Conduct Authority has publicly said that more than 80 per cent of customers face no exit charges at all. Some legacy schemes do levy fees on exit in line with the original contractual terms, but most of those have charges of less than 2 per cent, so a cap of 1 per cent will not have a massive impact on behaviour. 

I do not blame my gas engineer when he tells me that my boiler is not up to the modern standards, so I need to pay for extra ventilation – and he certainly does not offer to install it for free

I can see that those facing more substantial charges of, say, 5 per cent or more of their funds might have been put off to date, but only about 3.5 per cent of consumers are in that position, so any effect on the market overall will surely be marginal.

These percentages are small and strongly support the view that relatively few people are affected by the new cap, with a limited impact for most of them.

However, that does still leave about 150,000 pension scheme members who can expect a sizeable reduction in their exit fees to 20 per cent or less of the pre-cap charge. I have some sympathy for these people and am happy for them that they can get access at a lower cost in future, but the hard statistics show that they are a tiny minority.

Of course, the percentage penalty is only half the story. A 1 per cent exit fee on pension assets of £1m (the current lifetime allowance) would still generate a charge of £10,000, which does seem excessive just to be able to switch your own money to a different provider.

Sadly though, not many of us have quite that much saved in our pension schemes, and the FCA’s figures suggest most consumers facing any exit fee would pay less than £1,000.

Providers are unfairly penalised

Given the minimal impact I believe exit fees have had on freedom and choice, it is interesting to see the extent of the negative public perception on this issue. Consumers signed up to products that provided certain benefits for a certain price and are now outraged that their chosen provider might dare to stick to the agreed terms when the government unilaterally allows flexibility that was not originally costed. 

I do not blame my gas engineer when he tells me that my boiler is not up to the modern standards and I need to pay for extra ventilation – and he certainly does not offer to install it for free. It is also a bit rich of the government to be so critical of the pensions industry and to insist on a 1 per cent cap on exit fees while simultaneously introducing the lifetime Isa, with an exit fee of 5 per cent. 

The government’s own rules also penalise those who do take advantage of the pension freedoms by planning to only allow them a money purchase annual allowance of £4,000 afterwards, down from the current £10,000.

This hypocritical attitude by the state reflects the short-term and shortsighted rationale for extra flexibility in the long-term world of pensions. More than half of people using the freedoms cash their pension in entirely. 

Some will doubtless be investing their money wisely in a different environment, but anecdotal evidence suggests many are spending too much too soon, and others are missing out on higher returns and tax benefits by choosing inappropriate investments, even when they are prudent enough not to blow the entire pot prematurely. 

George Osborne may have brought forward a lot of tax revenue in a popular measure, but the true cost of freedom will not be felt for years. The ticking time bomb of pensioner poverty is a far bigger issue than a cap on exit fees.

Hugh Nolan is director at consultancy Spence & Partners and president of the Society of Pension Professionals