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.
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
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
Does not apply early encashment penalties
Does not apply early encashment penalties
Plans to review policies with penalties attached once final rules on Budget reforms are published