The Department for Work & Pensions (DWP) is planning to cap early exit charges for occupational pensions to ensure people over the age of 55 are not “unfairly penalised” for accessing their savings ahead of their pension age.
The DWP said people currently face average early exit charges of around 5% of their pension pot for cashing in their savings but the cap would be set at 1% for existing occupational pensions and 0% for any new contracts. The 1% cap is set to apply to the value of the member’s pension pot after any Market Value Adjustments.
“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,” said minister for pensions Richard Harrington (pictured).
“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.”
The Financial Conduct Authority (FCA) this morning announced it would be introducing a 1% cap on early exit charges for personal pensions, including workplace personal pensions, which will come into effect on 31 March 2017. The government intends to implement its early exit charge cap for occupational pensions by October 2017.
The government’s occupational pensions cap will be regulated by The Pensions Regulator (TPR), mirroring the FCA’s work for personal and stakeholder pensions. The government said it would consult on the regulations in early 2017.
TPR executive director for regulatory policy Andrew Warwick-Thompson said: “We welcome the DWP’s announcement today to implement a cap on early exit charges for occupational pensions.
“It is important that there should be a level playing field between trust and contract-based pension schemes. This is another important step in helping to ensure the best possible outcomes for savers.”
Due to the difference in the underlying primary legislation for occupational schemes and personal and stakeholder pension schemes, the government said it was likely the definition of early exit charges would look different when drafted in the Bank of England and Financial Services Act 2016.
The cap on personal and stakeholder pensions is a requirement of the Financial Services and Markets Act 2000 but the government insisted the intention was for both to have the same impact.
In its response to a consultation on its proposals, the government said it “has been clear the intention of introducing a cap on early exit charges is to remove a barrier to people accessing the pension freedoms”. Doing this, it explained, would protect the principle that all consumers who are eligible to access pension freedoms are actually able to do so.
“In this context the government is only concerned with capping early exit charges for those aged between 55 and their pension age,” it added.
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