FCA Will Cap Pension Exit Charges

FCA Will Cap Pension Exit Charges.

It has been mentioned before on this website and indeed by George Osborne, Chancellor of the Exchequer, that the government will legislate to restrict early exit charges on pensions. It is the view of the government that people are restricted in their retirement options by having higher penalties.

Last week, the Chancellor confirmed in yet another speech at the House of Commons that the government will legislate shortly.

Mr Osborne suggested that once the legislation is passed, which we believe will be covered in the March 2016 budget and as a result become part of the Finance Act 2016, the financial industry regulator, the Financial Conduct Authority (FCA) will then enforce any restrictions on pension penalties.

Comment

The Chancellor estimates that around 700,000 people are affected by higher penalties meaning that they cannot access new flexible pension rights. We suggest this is all about tax revenue for the government as many penalties are justifiable.

For example, if you set your pension up on a "commission basis" you will not have paid a fee for the advice when you set up the policy, commissions will then have been paid to the salesperson and these are then clawed back over time. In simple terms, the commission wrote has meant that the pension company has acted as a "factoring" solution for you to be able to pay for your advice spread over a number of years. If you cash in your pension early, all of those costs may not have been recovered yet so why should you be allowed to transfer your pension early and not face penalties?

Another example would be if you are retiring early then you are accessing your pension funds earlier than other members of the pension scheme and therefore will have your income from your pension sooner than others. This may mean that you receive more in income than your fellow pension members who remain invested and do not retire early. Why should you receive a greater level of income by retiring early? Many pension companies levy early retirement charges to balance the fact that you will receive pension payments over a longer period of time than those retired early.

That said, we are sure there are pension companies who abuse the position and may not be treating their clients as fairly as they should be and do levy excessive early retirement penalties just so that they can keep your money for a longer period of time and then you to charge you for the privilege on an ongoing basis.

We believe this is going to be a fairly difficult task for the regulator to make "blanket" decisions on schemes that have exit penalties given that in most circumstances the penalties may be down to how an individual set up the pension scheme and when they are looking to exit/retire early.

We wonder what will happen in future years, will a pension company received complaints because they were too flexible on reducing early exit penalties meaning that those who retired at the normal retirement date actually received less over the years. Yet again another example of government not quite understanding the complexity of pensions and how both charges and advice are paid.