A pension exit fee is defined as the amount charged by a pension company when an individual transfers their pension fund to another provider. In this post, we consider how exit fees are calculated, what we believe to be reasonable (and what is not) and future potential Government legislation on the issue.
Research by the Financial Conduct Authority (FCA) found one in 10 savers would be charged for accessing their funds before a specified 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 key issues are what level of fees are reasonable? What costs should a pension provider be reasonably expected to recover? What are the key elements of any fee imposed?
Pension Exit Fee – Key Elements
In their defence a pension company may state 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 could 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).
Let’s look at those in a little more detail and try to explain the industry jargon
A small charge to cover the administration involved in closing the policy is reasonable but the other elements are open to debate.
Recovery of Initial Commission
On older policies sales teams were heavily compensated by commission payments. Of course commision payments are now banned but legacy issues remain.
The pension provider often recovered commission payments across part (or whole) of the pension policy term. They could claim they need to recover the remaining part of these costs at the point the policy is transferred.
Reasonable in principle but the issue is the lack of transparency. For example, the pension provider may have taken a decision to recover costs over the first 10 years of the policy life but when a policy is transferred after say 15 years the recovery fee may be charged again.
Market Value Reductions
Market Value Reductions (MVA’s) may be applied to ensure those remaining in the pension fund are not disadvantaged by those transferring out, this is common amongst With-Profits Fund.
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 both to check that a pension 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. s. Following this initial consultation the FCA announced its final rules of capping early exit charges on existing contract-based personal pensions, including workplace personal pensions which came into effect from 31st March 2017:
- Any existing contract-based personal pensions, including workplace personal pensions created before 31st March 2017 will have early exit charges capped at 1%.
- If the charge is already below 1% (i.e 0.7%) it cannot be increased
- New contracts (after 31st March 2017) have a 0% cap
is is a step in the right direction however providers are still able to charge exit fees on certain pension switches. The FCA started another consultation paper and they are considering bringing forward a cap or ban on exit fees.
If you have any questions relating to pensions or fees please open a Chat or email us and we will be happy to help. If you would like to discuss the best way forward on your pensions then please give us a call or complete the form below and we will call you back.
This blog is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investment or course of action. The past is not a guide to future performance. The value of investments can go down as well as up and you may not get back the full amount you invested. Tax and financial regulations can change. Any figures quoted above are correct at the date of publication.