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FCA set to cap pension exit charges at 1%

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The FCA has proposed introducing a 1% exit charge cap for existing contract-based and workplace personal pensions.

The regulator today released a consultation paper that also proposed a ban on exit fees for personal pension contracts entered into after the cap come into force.

FCA strategy and competition director Christopher Woolard says: “Together with the ban on exit fees in future contracts, we are proposing a 1% cap on exit charges in existing contracts to ensure people can access their pension pots without being deterred by charges. This is an important step so people feel able to access their pension savings should they wish to.”

The FCA will be given both the power and duty to cap exit fees by parliament once the relevant section in the Bank of England and Financial Services Act 2016 comes into force.

The Department for Work and Pensions will also today announce its 12-week consultation “Capping early exit charges for members of occupational pension schemes”.

In March, Scottish Widows said it was removing exit fees from all of its workplace pensions. In the same month, Aviva, Old Mutual Wealth and Standard Life announced they would cap exit fees for individual and workplace pensions at 5 per cent.

Hargreaves Lansdown retirement policy head Tom McPhail says the proposed 1% cap does not go far enough.

McPhail says: “The fee should be capped at 0% and this would benefit a further 150,000 investors. A 1% cap is something of a victory for corporate vested interests. We hope that the cap can be brought up to a zero tolerance of exit barriers in due course.”

He adds: “The cap also only applies to those exercising the pension freedoms. Those wishing to transfer old, expensive private pensions to improve their value for money, while they are still building their savings, will not benefit from the cap. This penalises those who are doing the right thing by saving but are hamstrung from making competitive choices which would help their hard earned money work much harder.”

“Investors may also have to wait until March 2017. We are writing to FCA today for confirmation that anyone wishing to transfer from today’s date can have a guarantee that they can reclaim any charges – we want the ban to start immediately.”

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Comments

There are 9 comments at the moment, we would love to hear your opinion too.

  1. Philip Milton 26th May 2016 at 9:22 am

    Curious that all existing expensive contracts not covered of course – so let-off the hook. Of course, the big penalty schemes paid big commissions and costs simply being taken in chunky annual tranches – no wonder there is a penalty on early cessation. Wonder if this applies to say a property SIPP and charges on disposal of said property mustn’t exceed 1%… am I being difficult!

  2. Yes, now and about time

  3. I’m sure some tied companies will find a way round this, not mentioning any names?

  4. I wonder why they didn’t impose a commission cap instead of implementing RDR? Seems that they can do things if they want to!

  5. Julian Stevens 26th May 2016 at 11:46 am

    How many times has the FSA/FCA stated: We are not a price regulator?

  6. I worked for a company that marketed pension plans with enhanced allocation rates on single premiums and transfer values dependent on term to retirement (and they were not the only one). These were partially designed to attract funds from legacy plans from the first wave of direct sales companies that ceased trading, like Crown Life, Hill Samuel, Albany, etc. where clients were suffering transfer penalties on Initial Unit or Capital Unit contracts.
    So, if Client A obtained an allocation rate on a plan of 115% for example for a 30 year term to retirement, and now wants to access 5 years early, the ‘penalty’ of 5% that might be levied is not a penalty at all, but is just putting them in the same position as Client B who might have selected a 25 year term at outset and got 110% allocation.
    If the FCA treats this as a penalty and restricts it to 1%, then Client A will be unfairly advantaged over Client B!

  7. But the FCA never use retrospective regulations. I am no lover of the providers who have these penalties in place however a contract is a contract and those that were around a long time ago will have used these plans. This is the FCA contradicting itself once again in terms of what it does. They will not be happy until all the life and pension companies make not profit at all and become not for profit organisations. It is disgraceful that the Regulator is able to effectively break contract law by imposing the reduction in penalties on these old pensions which were costed for the long term (before the provider actually made any real profit on them). Its one thing to impose their will on new policies going forward – fine and I agree however to start interfering in the law that has previously existed is another and it should not be done.
    I seriously do not think the providers will take this without a legal challenge. Their margins have been squeezed to the limit on new business for many years and they make some profit from legacy plans, but they are in business to make money, as are we all. But making profit seems to be a very dirty word to the FCA

  8. I usually agree with Tom McPhail on things pension, but I nearly covered my screen in splutter at “the 1% cap is a victory for corporate interests”.

    Last time I looked Tom worked for a large corporate who will undoubtedly benefit from a 0% (as though it won’t on a 1% cap) especially if this is extended to transfers.

    No vested interest there at all eh?

    Ian Coley

  9. I have just (today) announced, a cap on the FCA budget for the next 10 years !! and propose that in fact the budget decreases over the next 5, at a rate of no less that 5% per annum !!

    Feels good to make arbitrary decisions now and again, and this one should get a good response !

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