A pension exit fee may be defined as the amount charged by a pension company when an individual transfers their pension fund to another fund. Exit fees apply to pensions set up years or even decades ago. The Association of British Insurers stated in 2015 that no pension sold today includes an early exit fee. In this post we consider how exit fees are calculated, what is reasonable (and what is not) and future potential Government legislation on the issue.
The Chancellor stated in his 2014 budget speech “I am announcing today that we will legislate to remove all remaining tax restrictions on how pensioners have access to their pension pots. Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want. No caps. No drawdown limits. Let me be clear. No one will have to buy an annuity.” However, with the introduction of the pension freedoms April 2015 the issues of fees came into sharp focus when individuals intent on taking advantage of the freedoms were discouraged by the imposition of a high exit fee.
Research by the Financial Conduct Authority (FCA) found one in 10 savers would be charged for accessing their funds before a named retirement date. More than 870,000 faced a penalty of £1,000 or more with 62,000 savers facing charges of 40% or more of their total pension pot
The Government perceive fees as a barrier to their reforms and introduced a consultation process (more below) to address the pension exit fee issue. The key issue however is what level of fees are reasonable? What should a pension provider be reasonably expected to recover to cover costs? What are the key elements of any fee imposed?
Pension Exit Fee – Key Elements
A pension company may suggest that pensions set up in the past were intended to be long term investments with a maturity date at retirement (65 years of age). They may therefore claim they have a right to recover a fee to cover
- Admin costs.
- Recovery of initial commission payment made to sales teams.
- Divestment of assets.
- Market Value Adjustments (MVA’s).
A small charge to cover the administration involved in closing the policy is reasonable but the other elements can be the subject of some debate. On older policies sales teams were heavily compensated by commission payments. The pension provider often recovered these payments across part (or whole) of the pension policy term.
The pension provider may therefore claim they need to recover the remaining part of these costs at the point the policy is transferred. The issue is the lack of transparency. For example, the pension provider may have taken a decision to recover these costs over the first 10 years of the policy life but when a policy is transferred after 15 years the recovery fee may be charged again which would be entirely unreasonable.
Market Value Reductions may be applied to ensure those remaining in the pension fund are not disadvantaged by those transferring out. The issue again is transparency over how the MVA is calculated and what is (and is not) reasonable. The same issue applies to divestment of assets
To the individual with no experience of financial terminology and process assessing what is (and is not) a fair and reasonable level of fees is a difficult task. It is therefore often best to consult an Independent Financial Adviser before implementing pension drawdown both to check that a transfer is the right move and to assess the level of fees.
Pension Exit Fees – The Way Forward
In June 2015 the Government started a consultation process on pension exit fees to determine how fees may be minimised, made simpler and more transparent. The document made a number of suggestions on a possible way forward and after due process it was announced in January 2016 that a the Government will place a duty on the regulator to cap “prohibitive” exit fees.
How the level of this cap is to be calculated and how it will be imposed and policed are all up for debate and it may be some time before a way forward is agreed. Some commentators have suggested that the fee cap may be set at 2.5% of a fund value but the details are still to be confirmed. In the meantime should you have any questions about a pension exit fee or pension drawdown in general then do not hesitate to get in touch. Call 0800 043 8341 or Email email@example.com. Alternatively, complete the contact form below and we will call you. We are authorised and regulated by the FCA and operate UK wide.