What will pension reform cost you?
Pensions freedom sounds easy. But as Merryn Somerset Webb explains, the reality isn't quite so simple.
Pensions freedom sounds easy. You have a pension. You want to cash some of it in under the new pension reforms. You tell your provider. They send a cheque. Job done. But it doesn't usually work quite like that.
There's always administration, and maybe hefty costs too. Some 500,000 people who took out pensions in the 1980s, 1990s and early 2000s face "early encashment penalties" if they take their money before they are 65, says The Sunday Telegraph. To see why, we need to look back to pre-Retail Distribution Review (RDR) days, when the financial industry made most of its money via commission.
A (high) commission was paid to the pension salesman upfront. The provider clawed that back from the client's savings every year, until their stated retirement age usually 65, but sometimes up to 75. So if clients take their pension before they turn 65, the provider's profits take a hit. Exit fees are designed to compensate for that.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Savers will be shocked to find that, 30 years after taking out a pension, they are effectively still paying the guy who sold it to them. They'll be even more shocked when they find out how much.
Standard Life told The Sunday Telegraph that the average charge is likely to be only 1% or so of the fund's value, and Old Mutual said it would be "less than £1,000" in most cases. But other firms refused to say and Zurich which suggests 50,000 or so policies are affected said the average cost would be about 5% of the value of any fund.
That's real money. So what can you do? First, find out if you are affected. Most (but not all) firms stopped selling this kind of pension long before 2012, so the older your pension the more likely it is that it will have an exit penalty. Then ask your provider for two things the current value of your pension, and its transfer value.
The difference between the two will be the cost of withdrawing your money or moving. You then have a choice. You can leave your money where it is until you are 65 before the last Budget, you assumed that's what you were doing, so you might as well stick with that plan.
Or you can move. Bear in mind that the exit fee represents the total profit that your provider planned to make out of you over the remainder of your policy term anyway. If you ask for a breakdown of those costs, which you effectively have to pay either way, then check the costs at the platform you might move your pension wrapper to, your freedom might not be as expensive as it first looks.
Otherwise, you might keep an eye on a review pending from the financial regulator: it is looking at policies sold by insurers since the 1970s. There is a chance that if they find exit charges unfair they will ban them. The report will be out in the next few months.
Also, many of the political parties are promising consumer-friendly attacks on financial services (the SNP is having a go at "unfair" pension charges and the Tories want consumer champion Ros Altmann to be a minister in their next government), so unless you are in urgent need of your pension money, it seems that as is often the case waiting and seeing is the best option you have.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
-
Nationwide hikes FlexPlus current account fee by £5 a month – is it worth it?
Nationwide’s FlexPlus current account is a favourite with customers, but it’s worth checking whether you are taking advantage of the perks after the monthly fee went from £13 to £18
By Katie Williams Published
-
Santander launches online pension that offers up to £1,000 cashback
Santander's self-invested personal pension offers customers cashback of up to £1,000 if they invest before 25 April next year - here is everything you need to know
By Chris Newlands Published