Early Exit Penalties Cap Confirmed

Early Exit Penalties Cap Confirmed.

The industry finance regulator, the Financial Conduct Authority (FCA), has today confirmed final rules to cap early exit charges for people who are eligible to access flexible pension drawdown of their pension scheme from age 55.

Many people with older style pensions have early retirement penalties, so if you set your retirement age at age 65 for example and then you wish to access flexible benefits from age 60, you may suffer an early retirement penalty.  Most of these penalties are pension companies recovering early years charges such as set up costs and commissions paid to financial advisers that were spread over the life of the policy, in the example earlier, to age 65.

From 31 March 2017

• Early exit charges will be capped at 1% of the value of existing contract-based personal pensions, including workplace personal pensions.
• Early exit charges that are currently set at less than 1% may not be increased.
• All new personal pension schemes set up after this date will not be able to apply an early exit charge at all, i.e.  they must be penalty free.. 

Comment

Access to our pension funds is key.  We actually think though that whilst it is good to have penalty free access, those people that did not pay a fee for advice but allowed their adviser to take commission are getting a better deal than they deserve.  If a consumer has paid a fee for their pension to be set up meaning they always had penalty free pensions such as our clients, why should those who did not and benefitted from spreading the advice cost over many years be allowed to get away it? 

We think it would have been fairer to introduce a sliding scale such as those usually deployed in defined benefit sector pension pensions.  Defined benefit/final salary/salary related schemes usually have an early retirement factor of say 0.5% for each month you retire early.  Whilst this is not the same, penalties capped for “commission” based pensions at say early retirement 1 year 0.5%, 2 years 1%, 3 years 1.5%, 5 years 2%, 5 years 2.5% may have been fairer.