Does the 1% cap on early pension exit fees go far enough?

The legislation was first announced by the Chancellor in January after a Treasury review into pension freedoms revealed the charges were a barrier to access for many consumers.

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.

However some commentators have argued that the cap does not go far enough or help enough consumers with accessing the freedoms.

Hargreaves Lansdown head of retirement policy Tom McPhail said: “A fee capped at 0% would benefit a additional 150,000 investors. This cap does not go far enough.”

He argued a 1% cap was “something of a victory for corporate vested interests” and that it should be brought down to a zero tolerance of exit barriers in due course.

He also said the cap only applies to those exercising the pension freedoms. Those wishing to transfer old, expensive private pensions to improve their value for money, while they are still building their savings, will not benefit from the cap.

Talbot and Muir head of pensions technical Claire Trott also argued that the proposals are not broad enough. She said: “It is a shame the cap hasn’t been extended to transfers for those under the age of 55 because there may be investors trapped in products that don’t offer the full death benefit options, that want to transfer, but are being held hostage by early exit penalties.”

However, Facts & Figures Chartered financial planner Simon Webster argued the 1% cap was a “good compromise” between consumers and insurance companies.

He said: “The cap is long overdue but there are two competing issues at play here. The penalty is obviously unfortunate and perhaps unfair for consumers, but owners of closed books will have bought, or be running, these books under the understanding that they will receive income of x amount per year – some of which will come from early exit charges.

“These companies need to make enough money to continue to run these books. Completely abolishing the cap might mean some of the smaller companies go bust. This would impact consumers in a more detrimental way than the exit charges did.”

The regulator said in its paper it was aware of the potential for consumer detriment caused by revenue losses to firms but decided “the impact for firms in complying with our proposals will be proportionate to the level of protection those proposals offer eligible consumers from the deterrent effect of early exit charges”.

It said firms will be financially impacted in two ways: from the additional exits by consumers who would otherwise have continued to pay ongoing charges, and the transfer to consumers who would have exited anyway but who will now pay lower exit charges.

It calculated the 1% cap will result in a revenue loss of between £46m and £89m across the industry in the four years from 2016, plus an implementation cost of £17m.

By comparison, banning early exit charges altogether would come to £74m-£143m plus implementation cost, according to the FCA.

The paper went on to assess the likelihood of solvency on the back of these revenue losses.

It concluded it did not expect a cap of 1% to materially affect the financial status of affected firms or significantly compromise their solvency.