Pension Exit Fees to be Capped

Pension Exit Fees to be Capped.

Many people are looking to access their pension fund early, after the age of 55, using the new pension tax ability drawdown rules that started in April 2015. The fear was that people would withdraw much of their pension funds, spend them wildly on luxury items such as cars, holidays and home improvements and subsequently run out of their pension fund earlier than anticipated.

Whilst being able to access your pension fund when you want to and withdraw as much as you want to might seem a retirement utopia given the alternative option of buying an annuity (a guaranteed pension income for life) where annuity rates are at an all-time low given low interest rates, low gilt yields and improving life expectancy, many investors are finding this not to be the case.

There are essentially three barriers to accessing your pension fund:

• early exit and early retirement fees
• your existing pension company not offering retirement flexibility meaning you have to transfer your pension to a new pension company that offers flexible access drawdown
• many pension companies only accepting flexible access drawdown applications for people who have received full financial advice, meaning that you incur additional costs in paying a financial adviser to advise you on the "good, bad and the ugly"

Consultation on exit fees

the government has launched a consultation, via the Treasury, with regard to tackling excessive early exit and early retirement penalties/fees. The consultation requests responses from interested parties on three main potential outcomes:

• a voluntary code of conduct solution where the pensions industry will restrict exit penalties and fees
• a cap on exit fees introduced by either financial services regulation or law
• a flexible cap that can be used in extenuating circumstances

Why do pension funds have early retirement and exit penalties?

For defined benefit (final salary and career average salary) pension schemes it is usual for these schemes to have early retirement penalties because the sponsoring employer may not have invested enough money in the employees’ pension scheme as yet because their retirement was not due for say another 10 years. In addition, by retiring and starting to draw your pension at age 55 you will be withdrawing your pension fund 10 years early and as a result receive 10 years’ worth of pension benefits before reaching your normal retirement age. The company pension trustees have a duty to be fair to all pension scheme members, not just those who are retiring early but also those who remain in the pension scheme and do not take any benefits until later. By taking your pension early you are potentially creating a financial strain on the pension scheme which may result in additional funds needed to be paid in by the employer to ensure the solvency of the pension scheme overall.

For investment linked pensions such as personal pensions and company money purchase pensions (defined contribution schemes) it may be that you received enhanced investment allocation rates and bonuses/enhancements in the early years or lower management charges, where the pension company was looking to keep initial costs lower for you and spread the charges over a number of years but, if you are now looking at early exit, those early enhancement charges may not have been fully recovered yet and so a penalty is applied to discourage you from taking your pension early so that the charges can be recouped or applying the penalty so that those early enhancement costs are recovered. In addition, many pension schemes were sold on a "commission basis" and again the charges associated with paying for the commissions paid out in the early years would have been anticipated to be recovered over the years but if you are accessing your pension fund early, the same rules apply to ensure that the pension company is not out of pocket.

Is there a hidden agenda?

We do not agree with applying a cap on exit fees. All financial companies are required to treat customers fairly. In most cases, actuaries will have already calculated what the expenses were to set up the pension plus any enhancements offered and then how those expenses and enhancement costs are recovered over the years. We do not think it is fair for any investor to have received additional enhancements to their pensions by way of enhanced allocation or lower charges or having their financial adviser paid via commission and then the pension company having no protection by having a cap placed on their exit charges if they are justifiable.

Our hidden agenda comment is based upon the fact that the more people who can access their pension fund without penalty means that they are withdrawing greater amounts of pension fund which means the government raises more revenue in taxes.

If exit fees are calculated and deemed to be unfair then of course any pension company must be taken to task but if there is a legitimate reason for the penalties and these can be justified via actuarial calculation then we see no reason for any early retirement fees.