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Should pension providers be forced to scrap exit fees?

Exits fees are unfair. If you’ve been following the national press coverage of pensions, that statement will seem so obvious as to barely need saying.

Much has been made of the devastating impact of exit fees on pension pots and savers’ ability to enjoy the new pensions freedoms come April, with the conclusion that any other outcome than providers dropping them would amount to a scandal.

Surely, no-one could defend evil insurance companies catching unwitting consumers in sneaky penalties if they try to switch to a rival, or take their pension early?

George Osborne’s pensions revolutionary Budget was sold around the idea of freedom – savers can finally do what they want with their pots. It is true to say that exit fees, some wiping out up to 35 per cent according to advisers, will act as a very effective disincentive to transfer their savings to somewhere that allows access to the range of new options.

There have been calls for the Government to intervene on savers’ behalf, but Steve Webb recently played down the scale of the problem, hinting he will not be bending any arms.

The pensions minister is right not to force providers to scrap early exit fees. Exit fees were, in the main, inserted to help recoup adviser fees that were priced on the assumption the customer was going to retire when they said they would.

That may seem inflexible and unrealistic by today’s standards but that’s just it ­– these policies were written decades ago when the pensions world was completely different.

For instance, some policies were designed around the idea that the running costs of the pension – including the commission paid to advisers for selling them ­– were paid back over the life of the policy. However, some customers chose to pay all their charges up front, meaning they would lose out compared to those who pay them over time if early exit charges were waived.

Likewise, with-profits customers would lose out if a subset of with-profits policyholders left with the full value of the assets.

As Dobson and Hodge IFA Paul Stocks points out, if the Government steps in and starts tampering with the past it sets a dangerous precedent.  

“I’m not against good deals for customers, but I’m pragmatic in so far as when pensions were sold by door to door salesmen and there was an office on the corner, high-costs basis products were just more expensive. In any walk of life, when you go back retrospectively and change things, you set a dangerous precedent. The world is just different now and costs change – it’s very easy to look back 20 years and say it’s a scandal.”

Likewise, with-profits customers “would be detrimentally affected if we were to waive a surrender penalty for a specific group of with-profits policyholders,” he says.

“This is because the surplus in the with-profits fund belongs to the with-profits policyholders and not the insurer.”

Rowley Turton director Scott Gallacher says it would be difficult for the Government or the FCA to get rid of the contracts and that, more importantly, such a move would “destroy confidence in anyone investing in the UK pensions industry”.

“It makes it hard for anyone to launch in the market if they can’t be sure of fees. We should have seen a flood of European companies coming to the UK, but apart from Now: Pensions I’d struggle to find anyone who has made a success of coming here.”

Of course consumers need to be protected, but so do the conditions that allow businesses to make confident plans about the future. Without that, and the competition it should bring, the very same consumers will lose out in the long run.

Sam Brodbeck is pensions reporter at Money Marketing

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Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. As I’ve written elsewhere, the primary issue (as I see it) is what’s written in the contracts and whether or not providers are taking unreasonable advantage of woolly wordings that allow them a free hand to impose whatever terms they feel like for each and every case.

    If the terms for early exit are explicitly defined in the contract, they shouldn’t be arbitrarily overridden just because they look a bit harsh by today’s standards. If they’re not, I suggest there probably are grounds for imposing limits on what terms providers are permitted to apply.

  2. Couldn’t disagree with this viewpoint more!
    To just shrug your shoulders and say ‘high-costs basis products were just more expensive’ is not acceptable – the pensions landscape has changed and it should not be acceptable to disadvantage customers just because their ‘pensions were sold by door to door salesmen and there was an office on the corner’. Increased pension flexibility has arrived which I would expect the industry to embrace and respond with innovative and imaginative products – not simply pick up a quick buck from older customers because ‘that’s just the way it was’.

  3. Wonder what everyone thinks of sipp providers who have now imposed exit fees on clients where the client came direct paid no salesman and entered into the contract being told there are no exit fees.

    The above does not seem fair.

    If I opened a bank account which allowed the bank to alter terms (as I think all do) and the bank initiated exit fees I don’t think that would be deemed fair yet sipp providers where it was not previously been explicit in exit charges have now had exit charges imposed.

  4. I agree wholeheartedly with Julian on this subject. Well said sir.

  5. I think it is fair to say that what is in place should stay in place. Everyone has to be able to make profit out of business. In my view there is no basis for trying to change this just because the world has moved on. The world of the motor car has also moved on so this is akin to saying that a car which was new in 2000 should have its trade-in price based in the current sale price of the up to date model which is simply bonkers. The clients who have these policies are so much better off than if they had never been sold them as they are likely to have nothing built up in pension by now had it not ben for the IB and OB insurance company sales teams across the country.

  6. From the perspective of what is right and wrong, NO, exit charges should continue to apply as it is sikply contract law.
    As an adviser however working on behalf of my clients, I will do everything feasibly (and economically) possible to try and avoid or circumvent exit fees for my clients.

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