FCA to ban future pension exit charges

"There is no such justification for early exit charges in the post-RDR adviser and product landscape."

For existing contract-based personal pensions, including workplace personal pensions, early exit charges will be capped at 1% of the value of a member’s pot.

In its consultation paper, the FCA said: "There is no such justification for early exit charges in the post-RDR adviser and product landscape.

"So we believe that a 0% cap for new personal and stakeholder pension contracts entered into after our rules come into effect will protect consumers from the emergence of early exit charges that could act as a deterrent on accessing the freedoms."

The FCA will be given the power to cap exit fees by Parliament once the relevant section in the Bank of England and Financial Services Act 2016 comes into force.

Christopher Woolard, director of strategy and competition at the FCA, said: "Together with the ban on exit fees in future contracts, we are proposing a 1% cap on exit charges in existing contracts to ensure people can access their pension pots without being deterred by charges. This is an important step so people feel able to access their pension savings should they wish to."

John Perks, Managing Director, Retirement Solutions at LV=, said: “Clamping down on excessive exit fees is absolutely the right thing to do as these are one of the reasons people aren't shopping around at retirement. At LV= we only have exit fees for a limited number of legacy pensions. To help create a more transparent world for our members, we are committing to the removal of all our residual exit fees by the end of 2017, and are actively looking at whether we can do this sooner."

Simon Laight, pensions expert at Pinsent Masons, said that "setting the cap at 1% is sensible" as many providers have already reduced their exit charges to the proposed new capped level and most modern contracts don’t have exit charges.

Laight added: “However Closed book firms, who bought back books assuming a certain level of charges income, will find this difficult. They have paid money for an income stream and now find the government is retrospectively taking away part of that income stream. This is Government interfering with firms’ property rights, in the name of public policy.  

“There is also an interesting juxtaposition: Government bans early exit charges for new pension contracts; Government mandates 5% penalty for early access on its new flagship lifetime ISA. Go figure.”