Early exit charge cap attracts criticism and praise

The FCA had started to focus on capping exit charges earlier this year, alongside a consultation launched by the Department for Work and Pensions seeking views on the introduction of exit charge caps for workplace schemes.

The financial regulator confirmed on Tuesday that early exit charges for existing contract-based personal pensions, including workplace personal pensions, will be capped at 1 per cent.

Encouraging early decumulation could turn out to be a problem that comes back to haunt us in about 15 to 20 years

Tim Middleton, Pensions Management Institute

On the same day, the DWP announced plans to introduce a 1 per cent cap on early exit charges for occupational pensions, and 0 per cent for any new contracts. Currently, the average percentage charge is 5 per cent. 

Removing barriers

According to the government, the change is designed to remove “unnecessary barriers” for people wanting to access their savings while bringing exit charges for occupational pensions in line with other stakeholder and personal pensions.

The FCA, which was given the power to cap early exit charges in February, said it is introducing the cap to prevent savers from being deterred from accessing their pension pots.

The DWP’s announcement to introduce charge caps did not come as a surprise, said Tim Middleton, technical consultant at the Pensions Management Institute.

He said the 1 per cent cap on early exit charges and the 0 per cent cap for any new contracts “seems eminently reasonable” and is consistent with what was proposed.

Early decumulation

However, Middleton warned: “The government policy does seem to be encouraging early decumulation.”

He urged the government to “think about the longer-term consequences of being seen to encourage people to access pension savings early”. 

Middleton said if individuals access money too soon, it is possible they are not going to be in a position to fund a longer-term retirement.

“This could turn out to be a problem that comes back to haunt us in about 15 to 20 years, when we have too many very elderly people with no savings other than what they’re going to get from the state,” he said.

‘Borderline farcical’

Tom Selby, senior analyst at AJ Bell, said: “It feels borderline farcical that while the FCA is moving to cap exit penalties at 1 per cent in the private sector, the government’s own lifetime Isa looks set to come with a whacking 5 per cent charge for access before age 60 in most circumstances.”

He added: “The government needs to take a long hard look at this egregious penalty and decide whether it is treating customers fairly.”

More broadly, the authorities should not look at the issue as “job done on unfair exit fees”, Selby said.

“Even a 1 per cent penalty could act as a significant barrier to thousands of people using their pension pot how they want,” he said.

“At the very least, the impact of these archaic charges on consumer behaviour must be vigorously monitored.”

Welcoming reduced charges

Alan Pickering, chair of professional trustee company Bestrustees, said it was essential to keep pension administration costs to the bare minimum.

He said the industry “has a particular challenge in dealing with legacy books of business where both entry charges and exit charges were baked into the commercial relationships between product providers and those who sold those products”.

Pickering cited mutuals and closed books of business, where “one has to be careful not to rob Peter in order to pay Paul”.

However, he added: “Given that many of these people have got relatively small pension pots, anything that we can do to reduce the charges applicable to these pots must be welcome.”