Treasury to consult on 'excessive' exit charges

Many schemes have found it difficult to offer full pension flexibility, meaning some members need to transfer to a different arrangement in order to access the freedoms.

But industry experts have said issues have been compounded by the time afforded to schemes and pension providers to prepare for the introduction of 'freedom and choice' in April, which were announced in the 2014 Budget.

Chancellor George Osborne announced today that the consultation – which will begin next month – will explore options for enabling members to access their pensions flexibly and without prohibitive exit charges, and to smooth the process.

“These include, if there is evidence of such penalties, the option of imposing a legislative cap on these charges for those aged 55 or over,” Osborne said. 

On Tuesday, the chancellor revealed that £1bn had been taken out of pension pots so far, by a total of 60,000 members.

Providers haven’t had very long to consider the impact of flexibility. The detail didn’t really come through until the later part of last year

Fiona Matthews, Towers Watson

Tom McPhail, head of pensions research at investment platform provider Hargreaves Lansdown, said the number of providers charging exit fees was “patchy” and many were not providing the full flexibility to their members.

“It stems from the reality that many providers aren’t currently equipped to give schemes access to all the pension freedoms,” McPhail said.

He added that while some schemes were unable to provide members with full flexibility, action should be taken to enable them to transfer as easily as possible.

“There’s an inevitability about it,” he said. “Given the problem some elements of the industry are experiencing in giving people access to the freedoms, the only thing you can do is give them the freedom to access them elsewhere.”

Fiona Matthews, managing director of consultancy Towers Watson’s DC mastertrust LifeSight, said: “Providers haven’t had very long to consider the impact of flexibility. The detail didn’t really come through until the later part of last year.”

Transfer challenges

The government also announced it would work with the Financial Conduct Authority to gather information on the difficulties faced by individuals who want to move pension provider.

An FCA spokesperson said: “We are already monitoring how firms have been implementing the changes and will be gathering further data in the next few weeks. The Treasury have asked us to report by August and we will work with the industry to achieve this deadline.”

It stems from the reality that many providers aren’t currently equipped to give schemes access to all the pension freedoms

Tom McPhail, Hargreaves Lansdown

Adrian Boulding, pensions strategy director at provider Legal and General, said the company only had exit charges in place for 1-2 per cent of its pension offerings, typically older ones.

“These are plans that were sold through a financial adviser and the way that advice was paid for was via small instalments up until retirement,” he said. And because some members will be looking to access their cash prior to their previously assumed retirement date, this means there could be a shortfall in this payment towards advice. 

The Association of British Insurers echoed Boulding’s view. In a statement, Huw Evans, director general, said it rejected “any suggestion that the industry is putting up unnecessary obstacles to hinder customers exercising their pension options”.

He added: “It needs to be remembered that the vast majority of customers eligible for the pension freedoms will not face any early exit fee. Where one is charged it is not a penalty for leaving early, but to cover the costs of setting up the pension, particularly commission.”

Fergus Clarke, board member at the Pensions Administration Standards Association, said: “We think it’s appropriate that providers can recover the cost of the investment they’ve made – provided that charges are reasonable.”