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Freedom and choice for all? Providers review early encashment penalties on Budget reforms

Providers with old-style pension policies plan to review early encashment penalties amid concern that some savers’ attempts to take advantage of new pension freedoms next year will be blocked.

Last week the Government confirmed it will introduce a ‘permissive statutory override’ to ensure scheme rules do not prevent savers from accessing their pension fund when the reforms come into force next April.

But experts warn people who have legacy pension plans could still effectively be excluded from the reforms because of the charges they will face if they try to move their savings.

AJ Bell marketing director Billy Mackay says: “The elephant in the room for many providers will be the clients handcuffed to old-style pensions by means of hefty early encashment penalties. 

“Advisers will be looking to determine whether providers will allow access to the rules for all clients, including [those with] old plans. If they do allow access, you have to ask how they plan to deal with encashment penalties.”

Legal & General says it plans to review its books of business, including policies with exit fees attached, in light of the Budget changes.

Asked whether the provider plans to offer the pension freedoms to all policyholders, an L&G spokesman says: “It is too early to say. We are reviewing our policies and have not finalised our position.

“The majority of our customers will not have a penalty for encashment or transfer after age 55. In the minority of cases where policies have a charge for early encashment, the same charge is levied whether customers take a flexible retirement income from us or whether they move to another provider for their retirement income.”

Skandia says it will reassess its back book after the Government has published details of the legislative framework for the pension reforms.

A Skandia spokesman says: “There is still some underlying detail awaited from the draft legislation expected in a month’s time and we will be reviewing what is required to deliver the additional invested income solutions to all policyholders over the coming months.

“Once we have evaluated whether the new income solutions will be applied to all existing products we will then review the options for the small proportion of client policies where early encashment charges may apply.”

Aviva says it intends to offer the Budget freedoms to all of its existing customers, although some members may be asked to transfer into more modern products.

Aviva head of policy John Lawson says: “Due to the difficulty in changing older IT systems, people with older-style plans may have to transfer to a new-style plan to take advantage of the new freedoms.

“At this stage it is not possible to be categorical about which plans can be changed to cater for the new rules because the detailed rules have not yet been published.”

Aviva capped all its pension charges at 1 per cent in 2001, removing most exit penalties in the process.

But it says a very small number of legacy specialist products, such as executive pensions and retirement annuities, may still have penalties attached. Lawson says these policies could also include valuable guarantees.

“Customers could therefore pay a high price for accessing the new freedom to take their whole pension fund as cash and we will be strongly encouraging them to seek advice,” he says.

Savers in the firm’s with-profits fund will also be hit with a market-value adjustment if they exit early.

Lawson says: “We do not regard such adjustments as exit penalties as they are designed to ensure that those who leave and those who stay receive a fair share of the fund’s assets.”

Phoenix plans to offer customers access to their pension funds from April 2015. However, the closed-book provider will wait for clarification on the tax rules governing the reforms before deciding how to treat policies with early encashment fees.

Friends Life says it will not remove exit charges despite the Budget reforms.

A Friends Life spokeswoman says: “It is our intention to make these freedoms available to Friends Life policyholders where possible.

“Some Friends Life policies have surrender charges which will still apply if a customer chooses to surrender their policy.”

Prudential says it does not apply early encashment penalties but does sometimes levy a market-value adjustment when savers exit its with-profits fund early.

Scottish Widows and Standard Life say they do not have any policies with early encashment penalties. Aegon says it will not remove early encashment penalties where they apply.

Adviser view


Scott Gallacher, director, Rowley Turton

We still come across a lot of cases where clients have exit penalties in double figures, so moving to a different plan would cost serious money. The issue in tackling exit penalties is if the Government or regulator comes in and tells providers to remove them, where is the stability they need to innovate and plan for the future? One thing that is clear is advice is absolutely essential in this area.

At a glance: where providers stand on early encashment penalties


Will not remove early encashment penalties where they apply


Provider has a “very small number” of legacy policies with penalties attached which will remain in place. Savers in its with-profits fund who leave early are also hit with a market-value adjustment charge

Friends Life

Will not remove exit fees on policies where they apply

Legal & General

Reviewing its policies in light of the Budget but says where early exit penalties are applied, they will be the same whether the member buys an L&G product or switches to a rival insurer


Does not apply early encashment penalties but sometimes levies a market-value adjustment when savers exit its with-profits fund early

Scottish Widows

Does not apply early encashment penalties

Standard Life

Does not apply early encashment penalties


Plans to review policies with penalties attached once final rules on Budget reforms are published 


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There are 5 comments at the moment, we would love to hear your opinion too.

  1. I don’t think the firms which levy the highest exit penalties have commented above (!?!?) and I also suspect that where penalties apply, it would take regulatory pressure to result in them being waived.

    Whilst it’s easy to knock providers, I do feel that it’s difficult to justify why they should scrap their ‘safety net’, charges wise – not least given the furore in the IFA world concerning the scrapping of ‘trail commision’. Yes pensions used to have high charges, but that reflected the non-IT, manual, directly sold, with an office on the corner, distribution model.

    Now we’re in a sub-1% world, should we really be looking back and judging the costs of 20 – 30 year old contracts against this benchmark?

  2. What do the contracts (policy doc’s) say? If they’re worded such as to allow the provider a free hand to impose whatever terms it feels like on the day (“an actuarial calculation” as it was once described to me by a representative of National Mutual Life), then surely abuse of this freedom should be the first line of challenge?

  3. We do come across some contracts with penalties and MVR’s but generally those over age 60 or close to NRD don’t have many. Our real issue with legacy contracts is those that contain an element of GMP. GMP presents the dual challenge of being a DB and DC arrangement all at the same time with a statutory restriction on transfer if the cost of the GMP income cannot be met by the fund. I am looking forward to the first stories of clients who turn up to their provider, ask for their money, and be told they are not allowed to have it. I have asked a number of providers on their thoughts….they have none (yet) and have seen no reference to GMP in all the Government, Treasury, HMRC or FCA papers.

  4. @James Dean – YEP – Good reason to put off sitting AF3 in my case as so much is changing it may be best to just stick to the simple stuff for clients and contract out the complicated occasional issue.

  5. good day for golf 18th August 2014 at 10:01 am

    Bit rich of AJ Bell to complain of hidden charges in old pensions when they have just introduced a foreign exchange charge of 1% per transaction with no record of this during the transaction and on the contract note after the transaction.

    It’s not even a one off charge as the platform does not allow you to hold foreign exchange, so on sale of foreign shares you have to switch back to pounds (another 1% foreign exchange fee) and if you want to buy another foreign share you have yet again the foreign exchange charge (deduct 1% again) – it’s ridiculous!

    But no surprise that AJ Bell are now making a point of promoting foreign share ownership on their platform. No surprise too they offer frequent trader discount on the share transaction fixed fee. So let me see you can trade at 4.95 gbp but you have a hidden foreign exchange transaction fee of 1%. Our industry is so cynical ?

    This is a totally backward step for a flat fee company to now introduce this charge. No highlighting of this charge is attempted; many might argue they have concealed it in their small print. The charge itself is listed 2/3rds of the way down their new charging list where there are around 27 other listed charges all of whom are low cost flat fees expressed in cash terms whilst the foreign exchange fee is not highlighted, no example is given in cash terms, and is only expressed as a percentage. It is a classic ‘needle in a haystack’.

    As a long time AJ Bell client (and promoter to friends and colleagues with no financial gain for self) I am outraged they have acted that way and so cynically sought to compensate themselves for the loss of the trail on unit trusts.

    AJ Bell claim it’s in their terms and conditions and therefore there is no requirement to disclose forex charge at point of sale. The profit for AJ Bell on this transaction is substantial and totally out of line to the amount of work involved. In my opinion they are laughing at the regulator and totally ignoring TCF.

    In their defense they may well argue Hargreaves Lansdowne, TD Waterhouse, and others also charge similar amounts. The industry has been trying for years to get away from the attitude of “well others do it so therefore it’s ok”. Finally regulators have systematically stepped in and put a stop to this sort of defense, if it’s wrong it’s wrong and I for one do not care who else is doing it- it is no defense.

    What surprises me is that with all the changes that have taken place in the industry, all the discussions, training, qualifications, and legislation has leant towards looking after the customer. And Sipp’s were meant to be a new way of dealing with clients in a transparent low cost manner and here we have the major SIPPs acting as if they can do as they please.

    If an advisor hid a charge like that he would be in serious trouble but they seem to have no problem getting away with it.

    On the issue of AJ Bell criticizing old style pension companies for hiding charges it is as usual in this industry another case of ‘pot and kettle’.

    P.S. In the interests of being fair and open I declare a personal interest in this issue. I am being charged a foreign exchange fee on my Sipp of 900 pounds that in my opinion should have cost no more than 20 pounds. The Sipp will shortly be transferred to another provider that gives me access to fx and allows me to deal in fx at a fixed cost of less than 2 pounds per transaction.

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