21st June 2016
Since July 2015 the Financial Conduct Authority has been consulting on capping early exit fees when people access or transfer their pensions.
Savers withdrawing money from their pension pots will not be the only group affected by capping fees, the ramifications for FCA registered firms could also be significant.
So what has been proposed and is there any indication of what the effects are likely to be?
Proposed exit fees cap
The FCA has proposed a cap of 1% of the value of an existing savers contracted pension pot at the time of exit. This includes workplace pensions.
Data from the regulator shows that over 670,000 savers have faced charges of up to 10% when trying to access their funds.
The FCA registered pension providers will not be permitted to apply exit charges to personal pension contracts entered into after the new rules and regulations come into force around March 2017.
The global pension provider Zurich has stated that early exit charges are not a profit source for them and Standard Life claims to have been the first pension provider not to charge early exit fees.
Dr Yvonne Braun, director of policy at the Association of British Insurers, said:
“More than eight out of ten customers do not have to pay early exit charges to access their pensions, as the FCA has acknowledged. Where they do, most fees are 2% or less and were put in place decades before the freedom and choice reforms were introduced.”
Loss of management fees
An individual exiting a pension scheme early means that the provider or administrator will lose the current and future management fees which would have been applicable until the point when the pension matured.
Pension brokers could also lose commission takings from the individual joining the scheme.
What do exit charges cover?
Exit charges are not designed to penalise the saver but rather to cover the costs, fees and penalties which are imposed on a particular pension fund.
The charge may be as simple as an administration cost. Or, it may cover the cost of funds invested in with-profits funds which impose a market value adjustment on funds withdrawn during times of economic uncertainty and insecurity.
If a pension provider or broker had to cover these costs rather than the saver then it would reduce income and profit.
Who could be affected?
Any FCA registered pension provider, broker or IFA dealing in pensions could be affected by the pensions exit fee cap.
This will especially be the case if exit fees make up a significant proportion of the business’ profits or if administration fees for exiting a pension are prohibitively high.
What can those affected by the fees cap do?
Any firm which is FCA registered and which may be affected by the proposed cap on exit fees can ask questions at the consultation and state their arguments against the cap.
The consultation deadline is 18 August 2018
Brebners can help
We can help pension providers and brokers with their business by reporting updated and new regulations and by keeping their business profitable by closely monitoring their accounts and advising on how to best manage their finances.
For more information or an initial meeting, contact us today or call 020 7734 2244.