What will pension reform cost you?

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.

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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.