Proposed early exit charge cap gets mixed response

The Department for Work and Pensions launched a consultation on capping early exit charges alongside the FCA announcement, which will run for 12 weeks.

Parliament empowered the FCA to impose a charge cap following the release of a Treasury consultation in February this year that concluded many people face early exit charges, which could act as a barrier to accessing their pensions.

One per cent is quite aggressive. I think the industry was expecting it to be higher

Andrew Pennie, Intelligent Pensions

Exit charges are one of many pension issues the FCA is focusing on over the next financial year, alongside the creation of a consumer protection model for the secondary annuities market, reviewing the effectiveness of independent governance committees and cracking down on pension scams.

The cap will apply to all who exit a scheme at or after age 55, to facilitate people looking to access their pensions following the freedom and choice reforms.

However, Claire Trott, head of pensions technical at self-invested personal pension and small self-administered scheme provider Talbot & Muir, said the cap should be applied to all savers to prevent penalties when, for example, they transfer to a structure that would better suit beneficiaries in the event of their death.

She said: “They might want to move scheme, but they wouldn’t be able to rely on this to prevent exit charges.”

Trott also queried the exclusion of market value adjustments from the cap, as they can constitute a charge in excess of the 1 per cent cap.

MVAs are described in the DWP’s consultation document as “reductions that may be made to the nominal value of a member’s pension benefits when they exit a pension scheme early in order to more closely align them with the market value of the assets which those benefits are comprised of at the point at which the member exits the scheme”.

Trott said: “It can be significant amounts of money… it can easily be more than 1 per cent, I’ve seen them as high as 10-15 per cent.”

Lisa discrepancy

Many queried the reasoning for setting the charge level at 1 per cent, in light of the 5 per cent exit charge that will be levied on those who leave the government’s new Lifetime Isa.

Andrew Pennie, marketing director at adviser Intelligent Pensions, said: “One per cent is quite aggressive… I think the industry was expecting it to be higher.”

Despite this, he said the cap was unlikely to be a burden for the majority of schemes, adding it would reverse an increasing trend towards exit charges that had developed.

“We did feel an increase in the number of people putting in exit charges in the last few years,” he said.

Steven Cameron, regulatory strategy director at provider Aegon, said exit charges were outdated: “The exit charges are a hangover from legacy charging structures that were put in place decades ago. We don’t have them on our modern range. They have no place in modern pensions. This is rectifying an issue of the past.”

However, he queried the effectiveness of solely capping exit charges as a means of increasing the use of freedom and choice when other, more significant barriers may exist.

“Capping exit charges may remove discouragement and make people say, ‘Yes, I want the new freedom'. Our experience is the biggest barrier to access is the tax charge [those leaving the scheme] will be subject to, especially if they take a lump sum.”

Those taking a lump sum could be subject to tax charges of as much as 45 per cent on some of the proceeds, Cameron said.

Simon Laight, partner at law firm Pinsent Masons, said the cap could pose a challenge to “consolidators” – providers who have bought books of policies from other companies, many of which will be from a time when exit charges were more common.

These schemes redeemed the upfront costs of the policies through annual charges, but where members transferred out they levied exit charges to cover the costs that were as yet unpaid.

“Usually contracts had really high exit charges written into them, it helps companies be compensated for the fact the ongoing charges will be lost,” Laight said.