The government has launched a consultation on early exit charges surrounding the pension freedoms that came into effect in April.
The consultation will examine whether exit charges should be capped for those aged over 55 years that are planning to withdraw money from their pension pots.
It will also look at how greater clarity can be provided around the circumstances in which someone should seek financial advice, and investigate how the process of transferring between pension schemes can be improved.
The consultation will be open for 12 weeks and will be accompanied by an online survey. A response will be published in the autumn.
Margaret Snowdon, director at JLT Employee Benefits, said: “It was with great fanfare that the Chancellor announced the freedom of choice reforms last year, but the road to implementation has been riddled with hurdles.
“Although those over 55 can now legally access their pensions as a lump sum, and some 85,000 have already done so, the penalty fees of as much as 20% will have seriously dented many pots and undoubtedly have prevented many more from taking advantage of the reforms.
“While the exact amount of money required to fund a comfortable retirement will always be subject to the vagaries of life expectancy, what is clear is that pensioners will need every penny that they are entitled to if we, as a country, are to avoid widespread penury within our pensioner community in future.
”Having said that, there are certain administrative and other costs that do need to be considered and a cap on fees of 2.5% would be a good starting point towards a fair and effective system. We welcome the government’s consultation.”
Richard Lloyd, executive director at Which?, added: “If the pension reforms are to be a genuine success, the government must take action to make sure everyone who wants to take advantage of the freedoms can.
”People should be able to switch without being stung by excessive exit fees if their provider doesn’t offer the full flexibilities.
”The government should also consider what other reforms are needed to further protect savers, including a charge cap on default drawdown products.”
The consultation is very non-specific when it comes to indicating precisely what changes or further controls the government would wish to see made in relation to some of the perceived problems relating to transfers and the need for financial advice in connection with the freedoms– more a case of kicking the ball down the road pending further evidence than anything else.
However, on exit charges there does appear to be a determination to reduce or even eliminate these by legislation, if necessary, if the industry shows itself incapable of dealing with the issue itself.
Three options are suggested for dealing with the firms that do make hefty charges:
– A cap on all “excessive” exit fees
– A flexible cap that could be used in certain circumstances
– A voluntary approach to restricting exit fees and charges
This is indeed a thorny issue which has been around for many years now and relates almost exclusively to older “legacy” schemes which clearly do not meet the standards we expect from more modern arrangements.
The issue has now increased in profile because of the pension freedoms and the allegations that some firms are charging up to 20% of the value of the pension pot, making it difficult if not impossible for individuals to withdraw their money.
I am sure we would all like to see scheme members get the best value possible from their pension savings and unless or until that can be achieved voluntarily it is highly likely that the Government will seriously consider a cap on such charges for those aged 55 or above eligible to access the freedoms.