Thousands of pensioners will be able to move their retirement money without incurring a hefty fee following the Financial Conduct Authority's (FCA) decision to cap early exit charges at 1 per cent from March 2017.
The new rules will affect anyone taking money out of a personal pension and are designed to help retirees take advantage of pension freedoms by switching away from older-style pots to more flexible schemes. The regulator has ruled that existing schemes will not be able to impose an early exit charge of more than 1 per cent, and early exit charges that are currently set at less than 1 per cent may not be increased. New contracts will not be able to charge any exit fee at all.
This means thousands of pensioners will no longer face charges of up to 5 per cent if they transfer their money out of pots that do not offer the new pension freedoms. The FCA has found that one in six people aged over 55 would currently face charges if they moved their money out of their pension scheme, and 66,000 out of around 670,000 consumers would have to pay a charge of over 10 per cent.
However, many feel the cap does not go far enough. Nathan Long, senior analyst at Hargreaves Lansdown, said: "There are also hundreds of thousands of people with large exit penalties under the age of 55 for whom the exit penalty cap will not help with pre-retirement consolidation, so it pays to be aware especially with older-style pension plans."
Broker AJ Bell also warned that a 1 per cent exit fee could still result in a sizeable sum and also called for the 5 per cent exit fee to be lifted on the lifetime individual savings account (Lisa), which has been partially designed as a pension savings product. "The 1 per cent cap on early exit penalties for pensions makes the 5 per cent government sanctioned early exit penalty for the lifetime Isa look preposterously inconsistent," said Tom Selby, senior analyst at AJ Bell.
