The regulator should completely ban all pension early exit charges to prevent any saver being penalised for taking advantage of the freedom and choice reforms, Hargreaves Lansdown has said.
The firm said even the 1% cap due to be put in place for leaving existing schemes should be brought down to nothing. It said exit charges were not unjustified following the pension freedom reforms.
The Financial Conduct Authority’s (FCA) consultation on the issue is due to close on 18 August.
The regulator is expected to:
• Propose a complete ban on early exit penalties for new pension contracts
• Allow penalties of up to 1% on existing pension arrangements
Hargreaves Lansdown said about 200,000 investors are expected to be affected over the next four years and reducing the exit penalty cap to 0% would save investors £50m.
However, it added the FCA argued a 0% charge cap would only help a few thousand employees but would cost the pensions industry millions of pounds.
The cap applies specifically to early transfers and withdrawals, where an investor chooses to access their money on a date other than the retirement age specified in their pension contract, the firm explained.
Head of retirement policy Tom McPhail (pictured) said: “For the vast majority of investors, the retirement date on their pension was agreed decades ago on an entirely arbitrary basis: no one in their 20s knows whether they’ll want to access their pension at age 55, or 60 or even 70, yet they are now going to be penalised for that.
“For most people, even the state pension age will have changed between when they started saving and when they want to retire. With the introduction of pension freedom in April 2015, there is now no longer any justification for applying these charges on investors who simply want to access their own savings.”
Hargreaves said it had responded to the consultation pushing for a complete ban on early exit penalties for both new and old contracts.
It said an investor with a £100,000 pension pot could end up paying a £1,000 exit penalty for what would be “simply an administration service which would cost the pension provider no more than a few tens of pounds to process”.
The FCA is due to publish a policy statement in the autumn. The rules are due to come into force on 31 March next year.
McPhail added: “Any investors faced with a substantial exit penalty might be well served by delaying accessing their pension pot until next March. In the meantime, they can contact their pension provider and ask for a one-off deal to cut the penalty.”
Mattioli Woods director Murray Smith said flexibility was essential for pension savers.
“People get stuck with a provider where it is too expensive to move their money. Or they are locked in by legislation. You need flexibility and transparency.”
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