This announcement comes as part of the government’s ongoing pension reforms, and the date set for the pensions cap is March 2017.
That instances of excessive charges being levied on savers have been allowed to continue unchecked for too long is a worry, and it has caused significant reputational damage to the industry as a whole. Such cases have seen a minority of unscrupulous providers being allowed to charge as much as they see fit to those looking to withdraw cash from the funds they have saved to pay for income during their retirement. Indeed, there have been some concerning reports of exit fees reaching as much as 40 per cent, though these have been difficult to corroborate.
Not everyone is affected. In fact, around 84 per cent of savers, or their individual pension pots, will be exempt from the charges, but this will still mean that an estimated 2.2 million savers are set to lose out.
So how do the charges work? If looking at a simplified example, some providers have been known to charge 10 per cent, meaning that if someone had saved £100,000 into their retirement account and were to withdraw the full amount, they’d lose £10,000 in fees before they even factored in the taxes that the government would charge on top of this – a considerable difference by anyone’s yardstick.
Reforms were undoubtedly needed as it is widely accepted that the state pension is no longer fit for purpose. They have allowed better access to pension funds, unused pension pots can now be transferred tax-free if the policy holder dies before 75, and options for people have widened such as selling annuities or switching to different products. However, the changes have also received criticism from some corners of the industry.
Indeed, although there is now a date for the proposed cap on pension exit fees, we still have no idea what that will be capped at, and there is always a risk that some providers decide that the cap becomes almost a standard charge. As an example, people who might have originally been charged two per cent could theoretically now be charged three per cent in line with what the cap has been set at.
Another criticism arising from the reforms is that it is a complex issue requiring expert financial advice. However, previous legislative change in the form of the Retail Distribution Review (RDR) has led to a massive gulf in access to the financial advice available to wealthy and less affluent savers.
RDR was brought about with good intentions to again give the public a better deal whereby financial advisors would need to be qualified to a higher standard. It was also intended that pension, investment and protection providers could no longer incentivise financial advisors to sell their products through commission.
Yet, what RDR meant in practice, if we look at the commission element, was that the minority of unscrupulous advisors were no longer incentivised to sell a financial product to a client over another that was actually more suitable.
This practice led to instances of miss-selling of products where some advisors decided that, although a product may not have suited their client’s needs, they might recommend it anyway as they got paid more for doing so.
Therefore, while RDR was a good thing in a number of ways, the government and regulators hadn’t factored in that advisors still needed to be paid for giving financial advice.
Ultimately, it should be stressed that the reforms represent a tentative shift for the better, and a cap on pension exit fees will hopefully see an end to any excessive charging.
In the lead up to March 2017, we should all hope that the government doesn’t dilute the proposed changes, and that savers do indeed get a better deal when the cap comes into effect, thus giving a much-needed boost to the pensions industry’s damaged reputation.
