FCA introduces 1% cap on early exit pension charges

People over the age of 55 looking to withdraw their pensions will pay a maximum of 1% from next year.

The Financial Conduct Authority said it is capping early exit charges on personal pensions at 1% from the 1  March 2017.

Early exit charges that are currently set at less than 1% will not go up. Firms will not be able to apply an early exit charge to personal pension contracts entered into after these rules take effect.

A similar cap on workplace pensions will come into effect in November next year.

Currently people can face average early exit charges of around 5% of their pension pot simply for cashing in their own savings.

Minister for pensions, Richard Harrington, said: “We are restoring fairness and creating a level playing field in a system that has favoured the interests of providers over consumers for too long.

“This new cap will protect people’s savings from excessive charges, so more of their money will go towards the comfortable retirement they have saved for.”

Christopher Woolard, executive director of strategy and competition at the FCA said: “People eligible for the Government’s pension reforms should feel able to access them as they wish. The 1% cap on early exit charges for existing pensions, and the 0% cap for new contracts, will mean that current and future savers will not be deterred by these charges from accessing their pension pots.”

Pension freedoms were introduced in April last year and allow anyone over the age of 55 to take some, or all of their pension, as a lump sum, with the first 25% paid tax free.

Nathan Long, senior pension analyst at Hargreaves Lansdown, said: “The capping of early exit penalties at 1% is a huge step in the right direction. The 147,000 people aged over 55 who were facing exit penalties in excess of 5% will be relieved that they are now able to transfer to a more modern pension now the shackles have been released.

“It remains important to be vigilant when transferring pensions, as 1% could still be a chunky sum to lose from your pension at the point of retirement. 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.”