The Financial Conduct Authority (FCA) has proposed to ban early exit charges for new pension freedom contracts and to cap existing ones at 1% of the value of the pot.
In a consultation paper out on 26 May, the regulator said the new cap will affect personal and stakeholder pensions – both individual and workplace – and self-invested personal pensions.
The Department for Work and Pensions is separately consulting on a cap on early exit charges in occupational pension schemes.
Existing contracts, which have early exit penalties set at less than 1% of the member’s policy value, will not be able to raise the charges under the proposals.
The legislation was first announced by the Chancellor in January after a Treasury review into pension freedoms revealed the charges presented an access barrier for many consumers.
However, new FCA data showed most personal pension contracts (84% as at 30 June 2015) do not attract early exit charges.
The regulator estimated about 747,000 people could be affected by the cap and there could be about 37,400 additional early exits in the four years to 2020 under the current proposals.
The rules are designed to affect only savers over the age of 55, who are legally entitled to access their pots and want to benefit from the freedoms before their pension contract ends.
However, the regulator said it does not rule out other policy initiatives may be appropriate in relation to other age groups at a later stage.
Director of strategy and competition Christopher Woolard said: “Together with the ban on exit fees in future contracts, we are proposing a 1% cap on exit charges in existing contracts to ensure people can access their pension pots without being deterred by charges. This is an important step so people feel able to access their pension savings should they wish to.”
The FCA will start capping fees once the relevant section in the Bank of England and Financial Services Act 2016 comes into force.
The FCA will take responses from the industry to the proposals until 18 August.
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