Pension Exit Charge Cap Not Enough

Pension Exit Charge Cap Not Enough.

A maximum early retirement or transfer out charge penalty of 1% has been proposed by the Financial Conduct Authority on workplace pensions.

Much has been written about people being restricted by penalties when looking to plan their retirement.

Many defined benefit pension schemes have early retirement penalties of say 0.5% per month for each month you retire early and we do not believe that a ‘gold plated’, costly and valuable defined benefit scheme should be restricted in the penalties applied as it will kill once and for this pension market.  We hope that the forthcoming Department for Work and Pensions consultation on “Capping early exit charges for members of occupational pension schemes” will not include defined benefits schemes.

Many investment linked private pensions and company defined contribution schemes have penalties because they were set up on a commission basis (i.e. if you leave, the pension company recovers the commission element that was paid to the adviser) or these costs were hidden with higher allocation rates and then penalties. 

Comment

In contrast, we believe that the FCA should go further with the 1% cap and reduce it to 0% on money purchase schemes to encourage pension providers, banks and financial advisers to be more transparent in how pension advice is funded and stop large, hidden commissions i.e. the pension company simply would not be able to afford to pay adviser fees and commissions without penalties.

A possible repercussion would be that annual fund management charges would be increased to the detriment of the saver.