Could pension exit fees be capped?
THE Government are considering bringing in a cap on the exit fees pension companies can charge people looking to withdraw money from their funds.
Under the pension freedoms that came into effect in April this year, people aged over 55 are entitled to access the money they've saved in defined contribution funds.
But there are accusations of providers making it difficult for savers to get to their money, with some charging up to 20% of the value of the fund for withdrawals made before savers reach a certain age.
The Government are also looking into making it easier for customers to switch from one pension provider to another.
We want you
Since the changes came into effect, the Government say 85,000 people have withdrawn £1.2 billion - although the Association of British Insurers (ABI) say the figure is more like £1.8 billion.
As part of the 12 week consultation, the Government want to hear from those who've accessed, or tried to access, their money by way of a detailed survey.
For example, we reported in June how Friends Life had limited the options available to their pension customers.
Those who wanted to access their money were given the choice of taking the lot but being liable for a hefty tax bill on three quarters of it, or moving it to a more flexible provider for a fee.
So among the questions is one asking in plain terms: "Has the existence of an exit charge impacted on any decisions you have made to access the pension flexibilities?"
People filling in the survey are asked to provide as much information as possible about any fees imposed, including the reasons they were given for the charge and how it was calculated.
A dated problem
But the ABI say it's really not that big an issue; manager for savings policy Ben Gaukrodger says "nearly nine out of 10 people making use of the pension freedoms will not face an early exit fee".
The ABI say the exit fee isn't a new charge, but instead is a deferred one: many pensions sold in the 80s and 90s included exit fees - and high annual charges - in their terms and conditions to help cover costs including the commissions earned by those selling them.
Others who appear to have escaped these fees, the ABI point out, have already paid the equivalent in charges, either when they joined a scheme or during its lifetime.
The association are also keen to stress that no pensions sold today come with exit fees - so this should be a finite problem.
The here and now
In the meantime, however, it is a problem - with the TUC saying that £26 billion is stuck in legacy accounts "with high fees and complex charging structures".
So the Government are looking at a few ways of tackling the situation, including:
- Capping all "excessive" exit fees
- A flexible cap that would only apply in certain situations
- A voluntary approach to restricting exit fees and charges
The Government hope that the responses to the consultation will help them define what counts as "excessive" - at what kind of level are those of us who want to access our pensions put off?
From that they could look at setting a de facto limit; this could be either a fixed percentage of the value being withdrawn or transferred, or a set monetary amount.
They suggest the "more nuanced" approach allowed by a flexible cap would benefit savers while also not penalising pensions providers for "justifiable" charges.
They point to the successful use of "proportionate regulation targeted at certain charges" in other financial sectors, such as that brought in on payday lending at the start of this year.
And they say it would address concerns about smaller pension funds - but the Government document [pdf] is unclear as to whether applying to cap to funds above a certain threshold would mean people with smaller pots could still be stung for the full fee, or whether they'd be exempted from them.
Finally, the Government are keen to hear from the pensions industry on how they think they can address the issue themselves.
There's the suggestion that perhaps fund managers might like to consider waiving or reducing fees when a customer says they want to transfer their fund from one scheme to another with their company.
What about the rest of us?
But the TUC say the consultation doesn't go far enough - because it's only interested in a small portion of the pensions industry.
They say there needs to be "genuine action to remove unfair fees and charges on all pensions," and that what they're calling piecemeal reform will "just be letting savers down".