FCA weighs reactions to ban on pension exit fees plan

FCA officials are assessing reactions to plans for a complete ban on early exit penalties for new pension contracts. Proposals, which would allow penalties of up to 1% on existing pension arrangements, were outlined earlier this year by the FCA.A consultation has now finished and officials are considering the responses, with the plans set to move to the next stage.Reducing the exit penalty cap to 0% would save investors £50 million, it has been estimated, with around 200,000 investors expected to be affected over the next four years.Hargreaves Lansdown responded to the consultation by advocating a complete ban on early exit penalties for both new and existing pension contracts.Tom McPhail, head of retirement policy, said an investor with a £100,000 pension pot could end up paying a £1,000 exit penalty for what would be “simply an administration service which would cost the pension provider no more than a few tens of pounds to process”.He said: “For the vast majority of investors, the retirement date on their pension was agreed decades ago on an entirely arbitrary basis: no one in their 20s knows whether they’ll want to access their pension at age 55, or 60 or even 70, yet they are now going to be penalised for that.“For most people, even the state pension age will have changed between when they started saving and when they want to retire. With the introduction of pension freedoms in April 2015, there is now no longer any justification for applying these charges on investors who simply want to access their own savings.”Adrian Boulding, policy strategy director at TISA, said: “TISA believes that pension early exit charges are, in the main, a throwback to product designs predicated on the illusion of retrieving up front commissions slowly and over the term of the contract.“In reality, they had been paid out immediately and could not be recouped from the distributor after the first two years, hence the need to go back to the members’ pension pot to reduce the value in the event of an early exit.“This type of charge has not been featured in products sold by mainstream providers for the last 20-25 years. Consequently, setting the cap at 1% will have little resonance with the customers impacted as they had little understanding of the charges mechanisms in the first place and would see any percentage charge as arbitrary, at best.“We strongly believe that the Government should take this opportunity to have a consistent policy on the rules for exit charges on the Lifetime ISA and pensions to ensure the needless arbitrage between the retirement savings vehicles is avoided.”The FCA has said it will publish a Policy Statement in the autumn 2016, with a view to the new rules coming into force on 31 March 2017.