In a consultation response released today, the government said it aims to implement the legislation before the end of March 2017.
In order to achieve this, the government will introduce legislation in the Bank of England and Financial Services Bill to amend the Financial Services and Markets Act 2000.
This will allow the FCA to set the level of the cap in line with their consumer protection and competition objectives.
During the consultation, individuals and consumer groups voted in favour of a strict legislative cap (86% of survey respondents favoured a legislative or regulatory approach) while the majority of pension schemes and providers preferred a voluntary approach, arguing that it would be an interference with existing contractual rights.
However the government responded that the FCA is "best placed to develop such a cap in a manner which achieves a fair balance between the important public policy objective of ensuring that early exit fees do not pose an unreasonable barrier to people accessing the pension flexibilities and the contractual property rights of pension firms".
Approximately 30% of people surveyed by the government said that they faced an exit charge when leaving their pension and a similar number of respondents indicated that early exit charges impacted on their decision to access their pensions under the freedoms.
Since the freedoms were introduced, people have accessed their pension pots flexibly around 400,000 times, taking out over £3.5 billion.
Nathan Long, Head of Pension Research at Hargreaves Lansdown, said:
“Capping early exit charges will unshackle thousands, allowing them to enjoy the pension freedoms in all their glory. Research has shown that would be retirees have already had to change their plans because of punitive penalties.
"The Government will also get tougher on transfer times, something which has been a thorn in the side of the retirees for years. Among the worst offenders, trust based company pension schemes will be forced into reporting their transfer performance. Transfers from these schemes currently take significantly longer and have to improve to give people a smoother, less stressful passage to retirement.”
