The Government will pressure pension providers into cutting exit fees on legacy policies, experts predict.
Speaking at Money Marketing’s Brave New World retirement conference in London last month, independent pensions commentator Alan Higham said the Government would be forced to act on early exit penalties following the FCA’s work on the issue.
The FCA’s report, published in September, found that nearly half a million customers have policies with exit fees of over £1,000.
Highman said: “The Government has backed itself into a corner by having this review. It’s got to come up with something otherwise it will look really, really stupid. So a deal will be done. It will not rip up contracts and send a message that you can’t do business here, but it could draw a line towards the end of the range of extreme charges and say ‘these are a bit too much, could you please find a way of solving this problem and we’ll give you something in return’.”
But EY senior adviser Malcolm Kerr said that without the high commission payments that necessitated exit penalties, very few people would have bought pension policies at all.
Kerr also suggested the Government consider adapting the Money Advice Service to advise people unable to afford full regulated advice.
He said: “One of the challenges that intrigues me is how to give advice to people with not very much money and the quandary some advisers have in that space where they feel they should be doing something but it’s not economic.
“There are several million consumers who can’t afford advice fees and probably don’t need advice services. So an idea I’d like to see considered is the MAS stepping up and start giving advice to those people who can’t afford to see a professional adviser.”
The panellists warned that while the pension freedoms had successfully given savers access to their pensions, the Government’s long-term objective was unclear.
Pensions Policy Institute director Chris Curry said: “We need a lot more information before we can tell if something’s really working or not. One of the biggest problems we’ve got is no one is really sure what it is we’re trying to achieve.
“If we’re interested in getting someone a good income in retirement, that has historically meant trying to maximise their income or security through retirement.
“But actually with choice the rules of the game are different and everything has changed. When we have spoken to ministers and asked them what they wanted the reform to achieve, they said it was for people to have made a choice, not even necessarily a good choice.
“If that’s what they are trying to achieve we also need to ask what it is the people themselves want. Income and access to their assets is part of it, but also how people feel and how happy people are with their choices is an important part.”
Higham said analysis of the first wave of people using the flexibilities was unrepresentative because many also had defined benefit pensions.
He said: “We need to put this into context. We have lots of people taking smaller defined contribution pots with quite a lot of DB pension behind them. If people take £10,000 or £15,000 now it’s probably not a big issue. But in 15 years’ time if people are doing that – and the median pot in the future is going to be around £56,000 – it’s a big problem.
“We shouldn’t read too much into what people with DB pensions are doing. Or people with very small pots. If you’ve only saved up £20,000 you’ve got a life of penury anyway. So what’s wrong with spending some of it in the first few years of retirement and enjoying yourself a bit?”