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Treasury threatens blanket charge cap in exit fees clampdown

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The Government is threatening to cap exit fees as it looks to remove barriers to people accessing the pension freedoms.

The Treasury has set out three options for limiting exit fees in a consultation published this morning. These include a cap on all early exit fees, a flexible cap or a voluntary approach for providers.

A fixed cap could either be set as a percentage or a monetary amount, which the Treasury says would provide “a clear simple limit” for both individuals and schemes.

However, it concedes such an approach would raise issues where, for example, high fees are attached to very small funds. The Treasury also acknowledges potential issues in applying a cap to contracts retrospectively.

By contrast, it says a flexible approach would allow for a cap to be limited to pots above a certain threshold, or to apply to certain components of an exit charge.

Such a stance would “allow for more egregious early exit charges to be capped to benefit customers, whilst ensuing that firms aren’t unfairly penalised for charges which are justifiable,” the Treasury says.

The final option of allowing the industry to lead with a voluntary approach would encourage trustees and managers to reduce or waive early exit charges, whilst avoiding the legal issues of retrospective action, the Treasury adds.

Officials are seeking views on the pros and cons of each approach, as well which components of exits fees or other charges could fall within the scope of a cap.

The Treasury says: “The Government is clear that any option which could cut across existing contractual property rights, such as a statutory cap on exit fees, would represent a significant step. Any such measure should only be taken as a proportionate means of achieving a legitimate objective in accordance with public interest.”

In laying out the plans, it cites figures from the Department for Work and Pensions which suggest one in 10 savers in workplace schemes could be affected by charges when they transfer their pensions. An FCA study from December last year suggested that 7 per cent, or £4.8bn, of total assets under management in legacy schemes were in schemes where savers would face charges for an early exit.

Of that sum, nearly 60 per cent, or £3.4bn, is in schemes with exit charges of 10 per cent or more.

A spokeswoman for the Association of British Insurers says: “No pensions sold on the market today have early exit fees and nearly nine out of ten people making use of the pension freedoms will not face an early exit fee. Providers will engage constructively with this consultation so all the relevant facts and issues can be fully understood.

“Many people are accessing the pension freedoms successfully, with over £1.8bn withdrawn in the first two months. For those few that are encountering problems we have set out an action plan to address these issues, which is with Government and the FCA.”

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Comments

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

  1. Andrew Campbell 30th July 2015 at 12:33 pm

    Hmmm.. Might impact SJP?

  2. Stupid Govt and Treasury – again. I was threatened with unfair charges (from no less than Standard Life). The solution is just to transfer to a more accommodating provider. In this case the charges on transfer are zero or negligible.

  3. This Treasury paper is well worth a read if only for the flowery language that it adopts! Before I have even finished Chapter two the range of words used to get to the point where the reader is asked to answer a question about exit charges includes;

    unjustifiable;
    disproportionate;
    excessive;
    unfair;
    significant; and
    prohibitive

    But my favourite part is 2.13 which concludes that …where it (the exit charge) is so high that even those with larger pots regard the level of charge as prohibitive. In these circumstances, the level of the charge might be considered disproportionate and therefore unfair and excessive.

    This is so subjective as to be next to useless

  4. I love question 3 as well; In your view what would constitute an “excessive” or unfair early exit charge? Please include any fees and charges that you would consider to be outside this definition and why.

    The answer to which is presumably;

    “Any charge that wasn’t written into the contract terms when it was started”

  5. I thought that government needed to air their concerns to the regulator and the regulator would then decide whether it was possible to urge or direct a regulated company to change their commercial practice. If the government is going to miss out the middle man in the decision making chain, what is the point of an independent regulator … Ah yes that’s right, they don’t have to fund it’s existence!

  6. So these contracts were signed in good faith and HMG now thinks they should be torn up.

    Good politics as it hits those nasty banks/insurers.

  7. It occurs to me that if contractually enshrined exit charges are banned or capped at just a token 2½%, there can be no discrimination between policyholders who want to cash out and those who’ve been waiting for an opportunity to transfer to a newer and better contract without getting hammered. Millions of policyholders may well do exactly that — why wouldn’t they? Should they do so, the impact on share prices may well be even more calamitous than it was as a result of the FCA’s bungled announcement of its (planned but now seemingly mothballed) closed book review. Where will that put Osborne? People will say that his intervention has caused more damage to share prices than that caused by the FCA which led to him declining to renew Martin Wheatley’s contract. Civil servants shouldn’t meddle in things that they don’t understand, yet still they do so.

  8. If this a genuine ‘idea’ or simply reacting to negative media/press coverage.

    As posted by Andrew Campbell above, I’m led to believe that there are some providers that impose exit penalties on contracts still being arranged now….perhaps that needs consideration in a world of non-commission, fee based advice? If the cost of advice is upfront and paid for at the time given, why charge penalties if a strategic change is subsequently needed?

    Secondly, if they are proposing (and I’m inferring they are) that they will ride roughshod over contractual agreements between a pension provider and their client then that is concerning. Frustrating as it may be (and I’m sat on the ‘frustration’ side of the fence) can we genuinely review charges of old contracts through the lens of modern, lower cost, IT based, remotely managed contracts.

    Maybe I should give advice for free just in case, in 30 years time, a Government or Regulator deems the cost of advice today to be relatively expensive?

  9. Why don’t these ‘experts’ investigate before they issue statements? Then they might explain why they consider it fair that someone who bought a policy with capital units should be made to be better off than another who bought an ‘exposed front end loaded’ policy or who paid fees. Or even why someone who bought a single premium policy with an enhanced allocation to units, in excess of the premium paid, should avoid the compensating conditions?

    If the exit penalties continue past an accepted retirement age, maybe there would be cause for concern but not when the sole reasoning is to enable policyholders to qualify for pensions freedoms so that HMRC can then rip them off earlier.

    FCA’s research suggests relatively few people over 60 have penalties but younger policyholders do. Such a pity they didn’t use age 55 as the appropriate age.

    Has the UK finally reached the point where the inmates have taken over the asylum or do we now have Government appointed ‘experts’ promoting the short term vested interests of their sponsor?

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