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Industry hits out at ‘ill-informed’ exit fee cap

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Government plans to cap pension exit charges have been slammed by experts, who brand the plans “worrying” and “ill-informed”.

Chancellor George Osborne said yesterday he would hand the FCA a new duty to cap “excessive” exit fees.

Around 700,000 people face early exit penalties if they move their savings, he said.

Osborne added: “The Government isn’t prepared to stand by and see people either being ripped off or blocked from accessing their own money by excessive charges.”

However, the plans have been criticised by experts.

EY senior adviser Malcolm Kerr says: “It’s concerning that the Treasury and the FCA are looking to rewrite contracts. It is a worry for the industry generally that the Government can decide many years after a contract was made that charges were excessive.

“There’s also no clues what excessive means, and that sounds quite subjective.”

Dentons director of technical services Martin Tilley adds: “It’s an enormously difficult thing to put on the FCA because they are meddling with contract law.

“This is an example of an ill-informed Government pandering to the messages of tabloid journalism.

“I can’t see that it could be implemented easily, or efficiently, or without doing more damage to the pensions industry while the Government is also trying to encourage people to save for retirement.”

Others have backed the plans, however.

AJ Bell chief executive Andy Bell says: “An early encashment penalty that gets in the way of someone accessing the pension freedoms feels wrong. We’d prefer to see a complete ban but a cap to prevent excessive charges is a big improvement on where we are today.

“It is debateable whether some exit fees really do relate exclusively to initial set-up costs or whether they are actually about ongoing provider profitability. In reality the charge was baked into the contract many years ago to ensure the provider made the requisite amount of money out of the product.”

Hargreaves Lansdown head of pensions research Tom McPhail adds: “Hundreds of thousands of pension investors currently face charges and restrictions if they want access to the pension freedoms or to transfer their money to a new pension arrangement.

“In some cases these penalties can run to hundreds or even thousands of pounds. This kind of financial bondage has no place in the 21st century.”

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Comments

There are 14 comments at the moment, we would love to hear your opinion too.

  1. Interesting to see A J Bell against exit charges. Yet their own pension has exit charges. £75 Standard transfer out. £25 per holding for in-specie transfer out etc. They do realise that those are exit charges?

  2. Why is it any surprise to anyone that Government pander to the majority view? As long as the so and sos get 51% of the vote then they will go to any length to shaft the other 49%. Rewriting law and contracts retrospectively is wrong and frankly imho illegal but taking on the big boys costs money.
    Perhaps HSBC should threaten to move if these fees are capped?
    (I am no fan of some of the excessive fees but in the majority of cases they are not excessive and clients may well have benefitted from a reduction in up front fees. They only have the pension funds now because someone flogged the pension in the first place…)

  3. paolo standerwick 20th January 2016 at 9:22 am

    As Martin Tilley says rewriting contracts is wrong. This is why the regulatory system is flawed with the regulator having too much power.

  4. “It’s an enormously difficult thing to put on the FCA because they are meddling with contract law”. It didn’t seem to matter when they did that for renewal commission which was a contract between my firm and the provider! Now that the providers may get hit, they object.

  5. Hargreaves Lansdown head of pensions research Tom McPhail adds: “Hundreds of thousands of pension investors currently face charges and restrictions if they want access to the pension freedoms or to transfer their money to a new pension arrangement.

    “In some cases these penalties can run to hundreds or even thousands of pounds. This kind of financial bondage has no place in the 21st century.”

    Really? I signed a contract for my broadband recently and soon after a better deal was available. I would have quite happily switched but the penalty was in excess of £300 so I’ve decided to stick with the contract I signed willingly at the time.
    This is not financial bondage it is a contract signed without pressure (at least from the providers side). While I’m sure some of the penalties look and even could be excessive, not all will be. Features like bonus units, loyalty units, enhanced allocation etc can all be present on older contracts and so term can have a significant impact on profitability (or lack of).

    To use such a blanket condemnation I would argue is irresponsible and short sighted almost as if there is a vested interest for HL in breaking these kinds of contracts?

    We can not continue to ask for customers of financial services to take responsibility for their actions if the response to any cry of “we didn’t read it” / “we didn’t understand it” is met with a coo from the government or regulator of “there, there we’ll make it better and make the problem go away”.

    All opinions are of the author alone.

  6. I have 6 pensions which I am looking to consolidate into a SIPP to avoid the requirement for a Annuity (another example of rip-off Britain). One of the pensions is a legacy NPI pension (now managed by Phoenix life). It may only be a small one at £39,857, however the surrender value is £34,018. How is a £5,893 (14.6%) penalty to stop people taking finds out of a closed book operation justified? This pension is the WORST performing of my 6 by a long way. Of course the legacy / closed book providers wil complain because when we can avoid these penalties customers will move their funds to a professional, ethical provider who actually add value to the fund!

    • The other question to look at is, if the plan is one of NPIs old Section 226 plans, does it have a guaranteed pension within it, some of the old NPI plans had quite a good guaranteed pension on it – equivalent of a 10% annuity rate – just a thought.

  7. @Philip Cottam. I feel for you and one can only assume that the penalty is due to it being in their with profits/unitised with profits funds based on my experience of dealing with them for clients. If it has been so bad at performing you should have taken advice a long time ago to switch out of it and taken any hit way back when. It sounds like you could be in one of their WP funds based on that amount of exit fee and really poor performance.
    Just because you are annoyed (and rightly so) at the exit fee it is no reason to scrap them. A lot of providers can only subsidise the new pension charges along side their profitable old book of biz. The Govt are clueless about pensions and the regulator not much better and between them they are going to regulate the pension industry out of existence.
    I don’t think for one second they providers are going to accept this without a fight and I can see a long and costly legal battle ensuing. Hopefully against the Govt because if its against the FCA we will all end up paying the bill with the providers paying their own legal bill plus the FCA increase in fees.
    It is scandalous that any government tries to retrospectively change contract law.

  8. John Hutton-Attenborough 20th January 2016 at 12:07 pm

    @PC.
    NPI’s With Profit exposure is such that there are considerable liabilities on the fund (significant GARs similar to Equitable Life) and the assets of the fund are only sufficient to potentially meet all of these liabilities as long as the policies reach there selected maturity or retirement dates. If you choose to take your fund away at an earlier date than this then you have to “share” in the liabilities hence the MVA penalty which will always exist until you reach NRD when the policy (should have) a MVA free date. Check to see if the policy includes a guaranteed annual bonus (4% pa from memory) and if so probably best to hold on to it at least till NRD. 14.6% demonstrates the scale of NPI’s problem!

  9. @PC
    In addition to previous comments regarding your NPI policy I would also like to take issue with your assertion that annuities are another example of “rip-off Britain”. Elsewhere on this site, Prudential is recorded as stating that new Solvency II regulation from the EU has resulted in them pulling back from writing annuity business due to the additional capital reserves that now have to be set aside.
    There was a report I saw last year that examined the US and UK annuity markets, as there are many similarities between them. Its main conclusions (from memory) were: –
    1. Margins on annuity business are broadly equivalent between the two markets.
    2. Annuitants in the US receive, on average, up to 25% extra income in exchange for the same lump sum.
    3. In light of 1, it concluded that most of the difference in 2 was explained by much greater regulatory costs and capital requirements in the UK as opposed to the US.
    So if annuities are a “rip-off” then the blame lies almost exclusively with the regulators in the EU and UK, not the providers; although many would also argue that QE is also partly to blame.

  10. It’s all very well for Hargreaves Lansdown head of pensions research Tom McPhail to add that: “Hundreds of thousands of pension investors currently face charges and restrictions if they want access to the pension freedoms or to transfer their money to a new pension arrangement.” but what about the exit charges imposed if people want to encash/reregister/transfer their HL ISA? Is this not arrant hypocrisy? Let he who is without sin cast the first stone.

  11. This is what was voted for and there are plenty of other things this Government has done which is elitist and disgraceful. At least on this occasion the masses should benefit and we cannot blame a non-elected quango for making poor ill informed decisions but rather one elected in England to benefit an middle England majority. You really have nothing to complain about on balance. Try being subject to a Government you do not agree with, did not vote for and have little chance of ever getting rid of regardless of how many public cock ups they make or how clear it becomes that they do not represent your interests or bother to care about being seen to.

  12. peter mulholland 21st January 2016 at 7:50 am

    Aj Bell again ! At least those old contracts kept to the charges stated where as Aj Bell add additional ones in later and just to make sure add exit charges!
    The one that moved me was the fx charges – in out every time you buy sell another 1%! And yet they bang on about buying foreign shares – small wonder! still the industry has never been short of hypocrisy.

  13. Is it not ironic that the worst of all “exit fee’s” are applied to CETV’s from state sector schemes? They don’t call it a fee, but because the politicians of yore were such shysters, they wanted to hide liabilities and promised unfunded pots of money away behind such terms.

    And thats before we even consider that transfers out of the state sector schemes to access the pension freedoms are banned, because it won’t be in the pensioners interest..

    However any other transfer or review is required by the regulator to be done on an individual basis.

    Yet more rank hypocrisy and lies from George Osborne, what amazes me most, is that so many reading these boards will have voted Tory at the election and will continue to do so….

    And then you moan about George doing what George does. You might want to read Einsteins quote about doing the same things over and over again..

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