Thousands of the savers who took advantage of the new rules allowing them more flexible access to their pensions will have paid high fees for the privilege. Now, 18 months after the pension freedom rules were introduced, the government is proposing to limit the exit charges levied by some workplace pension schemes on savers who withdraw their money early, to a maximum of 1%.
The cap is intended to help savers whose workplace schemes charge a fee when someone over the age of 55 accesses their savings before the scheme's official retirement age either to transfer the money to another provider or to begin withdrawals.
Not all schemes charge exit fees, but where they do apply, fees average around 5% of the total pension pot, with the worst examples charging more than 20%. In some cases, schemes apply complex charging structures, where younger savers in particular have to pay more. In others, fixed amount cash fees have hit savers with smaller pension funds disproportionately hard.
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Ministers now say workplace schemes should not be allowed to charge more than 1%. And for savers joining such schemes in the future, exit fees will be banned altogether. The rules will be introduced alongside a similar crackdown on exit fees charged by providers of individual pension plans, such as personal and stakeholder pensions, which have also been accused of levying excessive charges on savers aged over 55.
From April 2017, the Financial Conduct Authority, the City regulator, will ban personal pension providers from applying exit fees of more than 1%. Plans set up in the future will not be allowed to apply any charge at all.
However, it will still be crucial for savers to check the terms of their schemes very carefully even a 1% exit charge may be a substantial cash sum. Moreover, the new rules only apply to savers over the age of 55. While this will protect people transferring pension plans from one provider to another after this age a common option for those taking advantage of pension freedoms thousands of under-55s will still be vulnerable to high exit charges.
Lifetime Isa savers must be warned about exit charge
Savers who are planning to take advantage of the new lifetime individual savings account (Lisa) when it becomes available in April 2017 should be warned about potentially punitive exit charges, regulators say. The Financial Conduct Authority will require any savings provider offering a Lisa to warn savers about such fees before they open an account.
Lisas are aimed at savers aged between 18 and 40 and the account will offer a government bonus of 25% on savings of up to £4,000 a year (so the maximum bonus will be £1,000 per year). However, money saved into a Lisa must be used either to help fund the purchase of a first house or as savings for retirement. Savers who access their cash before the age of 60 for any purpose other than a first property purchase will almost always have to pay an exit fee of 25% of the amount withdrawn from the account.
This penalty is so high that some Lisa savers who withdraw money early could end up getting back less money than they had paid into their plans. A saver making an £800 contribution to a Lisa would get a £200 top-up, taking the value of the plan to £1,000. But withdrawing the money after, say, a year, could trigger a £250 exit charge, with the saver receiving just £750 plus a few pounds' worth of interest.
In addition to the exit-charges warning, Lisa providers must also warn savers not to treat Lisas as a substitute for workplace pensions, the FCA said. The regulator is concerned some savers may opt out of their workplace pension schemes in favour of paying into a Lisa, thereby missing out on additional pension contributions from their employer.
In the news this week
Thousands of people enjoying valuable benefits and lower tax bills courtesy of salary sacrifice schemes offered by their employers will soon have to cover these outlays separately, following the Autumn Statement. Philip Hammond, the chancellor of the exchequer, announced last week that he is to crack down on workers who swap pay for perks such as gym membership, company cars and health checks. Most salary sacrifice benefits will be phased out with effect from April 2017.
The move will be a disappointment for those who take advantage of salary sacrifice schemes to put them in a more favourable tax position. The idea is that you give up part of your salary and, in return, your employer gives you a non-cash benefit. There is less tax, or even no tax at all, to pay on this benefit, and since your salary will be lower, less income tax and national insurance will be deducted from your pay. Your employer also pays less employers' national insurance and may share some of the savings with you.
Hammond said salary sacrifice schemes involving pensions, childcare vouchers, ultra-low emission cars and cycle-to-work benefits would all be excluded from his crackdown. However, the tax advantages on other salary sacrifice benefits will largely be abolished from April 2017. Plans set up before then will be protected for a further year, and schemes involving cars, accommodation and school fees can remain in place until April 2021.
Annuity providers will be required to tell customers how much they could potentially gain by shopping around, under new rules to be enforced by the Financial Conduct Authority from September 2017. The regulator says any saver approaching an annuity provider after that date would have to be given details of better deals available from rival providers. The move reflects the regulator's frustration that 60% of people converting their pension savings into retirement income via an annuity simply take what is on offer from their existing pension provider.
Four out of five of these savers would be able to get a better deal from a rival annuity provider but although the industry has been required to tell customers they have this "open market option" for several years, the number of savers shopping around has remained stubbornly low.
