Much has been written on exit fees and how they are a rip-off, but there hasn’t actually been much debate.
If there had been, the headlines might have been very different from those that we are seeing at the moment.
With pension freedoms almost a year old now, those approaching retirement were rightly excited by the prospects of having the ability to get their hands on their money and not having to purchase an annuity.
The Financial Conduct Authority is currently consulting on the level of exit fees and has given the impression that the outcome will be a cap on the amount that providers can charge.
In part this is due to an investigation that concluded that 16% of customer aged 55 and over could face an exit fee, amounting to up to 4 million people. Of these, 66% faced an exit fee of over 10%, 81,000 of between 5% and 10%, 165,000 between 2% and 5% and 358,000 between 0% and 2%.
Indeed, we have recently seen Scottish Widows remove exit fees for workplace pensions and Standard Life along with the Prudential issuing statements saying they will be capping exit fees.
But what concerns me is that this is all a knee-jerk reaction and in fact a marketing ploy.
To me it is very unfair on the providers, all of whom had contracts with their policyholders which clearly stated what the charging would be over the lifetime of the policy.
In return they would administer it, invest the money and at the end of the policy enable an annuity to be purchased.
Immoral?
When many of these providers set up these policies, they also offered the annuity at the end, a cradle to grave contract.
So it seems rather immoral to now want to impose today’s pricing on contract terms that would have been set up possibly 20 to 30 years ago. In effect asking the provider to reduce their fees, when they have delivered on their side of the contract.
If you think about public sector schemes, they don’t enjoy the benefit of pension freedoms, but look at the Teachers’ Pension Scheme, which is administered on behalf of the Department for Education, it imposes a reduction if you take it before state pension age.
It is a 5% actuarial reduction for each year you take it early, and with the increase in state pension age, there is also a 3% reduction for the years from age 65 to 67.
So, if you had a retirement age of 65 under the Teachers’ Pension Scheme at the moment and took your pension at 55, there would be an almost 50% reduction in what you would receive. To be honest, I can’t see that there are many, if any, insured pension policies which would have such a large early exit fee.
Perhaps if it is the case that as an industry we remove or cap exit fees on those wanting to leave a contract early, then we should also be lobbying the Chancellor and regulators to reduce the actuarial reductions on those opting to retirement early.
Perhaps not an argument the industry will win, but a valid point none the less.
Ian Stewart is joint managing director at Dentons Pension Management
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