The government's pension exit fee consultation has begun, tasked with deciding whether pension exit fees should be capped or cut for those people wishing to access their pensions early. It will ask pensioners and industry experts what other barriers there are that are preventing people enjoying the full advantages of the government's pension freedoms and how these barriers may be removed.
Pension freedoms were brought in by the government earlier this year. Before their implementation, people's only choice when taking their pension was to purchase an annuity, a guaranteed income for life. Now savers have a much greater freedom to spend or invest their pension pot as they wish, or at least that is the theory. Exit fees are hitting savers who are wanting to take advantage of the new freedoms which is why both George Osborne, the Chancellor of the Exchequer and Iain Duncan-Smith, the Secretary of State for Work and Pensions have raised concerns that some companies are not being as flexible and as compliant as they could be in helping savers enjoy full pension freedoms.
What will the consultation form concentrate on?
- Early exit penalties: the consultation will investigate excessive charges for early exit, including looking at the possibilities of a cap on charges.
- Transfer processes: how can the processes be made smoother and more efficient when transferring between schemes.
- Financial advice: should there be greater clarity as to the circumstances when people should be taking financial advice?
It's the early exit penalties that will be focussed upon most, with the consultation setting out three proposals for a cap on the fees charged.
- A blanket cap - This would mean all pensions schemes charging a fixed percentage of the fund value for all transferring pension pots. However, one of the drawbacks of this could be that it could deter smaller investors from moving their savings elsewhere.
- A flexible cap - This would be a cap only to be used on larger pension pots and would be smaller on pots with less funds in them, meaning that it may not discourage them from transferring like a blanket cap.
- Voluntary fee - This would allow the pension industry itself to set and even waive fees as they see fit.
The consultation will run for 12 weeks with a full response from the government due to be published in the autumn.