The reverberations of George Osborne’s back of a fag packet assumptions which led to pension freedoms continue to be felt, this time in the form of a cap on early exit charges.
Early exit charges were quickly identified as a barrier to those wanting the freedom and choice they were promised, and from 31 March, we will have a 1 per cent cap on existing pension schemes which is designed to smash that barrier.
The FCA has been berated for intervening when it previously said it would not regulate on price. In its defence, the FCA has been at pains to stress it was given a duty to cap exit charges by Parliament, the subtext being it did not choose to do so. The regulator has been charged with negotiating a safe passage for pension freedoms, and it is delivering on that.
The cost of the cap to the pensions industry could hit over £100m by 2020. Those numbers may have been massaged upwards by providers who did not want the cap to see the light of day. Nevertheless, the cap risks costing a lot of money, but whether it will materially impact the high exit charges operated in the market currently is questionable.
I do not want to be over-egging the pudding here. FCA indicative numbers suggest that last year 3.4 million consumers aged over 55 would not have been charged for accessing their pension early. But that left 670,000 who were subject to a charge. And that is before we get to those who are under 55. And those who face market value adjustments for wanting to access their benefits, an early exit charge by any other name. And then there is the whole question of St James’s Place, which is adamant its early exit charge of up to 6 per cent is compliant with a 1 per cent cap. Money Marketing asked how this could possibly be the case, but was met with a radio silence.
There are those that object to the cap on the grounds that existing contracts are not something the FCA should be meddling with. There are those of the opposite view, that if exit charges are so detrimental that they need to be capped, then why allow them at all? I do not know the answer. But there is a gap between what came out in the industry consultation, and the reality of the cap’s impact. This is what happens when the FCA is forced to do the bidding of someone no longer in Government.
Natalie Holt is editor of Money Marketing – follow her on Twitter here