A ban on rip-off charges for people who dip into their company pension pot early comes into force today – saving many people thousands of pounds.
The crackdown includes a 1 per cent cap on early exit charges for those aged 55 or older who want access to the funds in their occupational scheme.
Those that start saving into a workplace pension from now on will not have to pay a penny in exit charges under the new rules.
Previously greedy pension providers were able to clobber savers with exit charges that ate up as much as 5 per cent of their retirement pot – sometimes more.
Fast living: After pension changes in 2015, up to £10billion of savings were released
It meant someone with a £250,000 nest egg paying exit fees of £12,500. In rare cases total charges worked out at an eye-watering 40 per cent.
The move follows new pension freedom rules introduced in April 2015 that ended the requirement for pension savers to buy an annuity – which is an income for life paid for with a lump sum. This created a surge of hundreds of thousands of people aged 55 or over releasing over £10billion in savings.
The money has been spent on everything from home improvements to splashing out on holidays of a lifetime, buying sports cars and even plastic surgery. Experts believe rolling out the new exit fee cap could lead to a renewed surge in people dipping into their pots to go on a spending spree.
Former Pensions Minister Steve Webb, who is now director of policy at insurer Royal London, believes the move could affect about one in six pension savers. He says: ‘We should not expect a gold rush of people spending money – as it was only a minority who faced being charged extra for accessing their money.
‘Although it is often seen as an exit fee, it is a charge that customers signed up to when they first took out the contract so is not totally unreasonable. So it is probably fair to keep the new 1 per cent cap rather than cancelling it altogether for existing contracts.’
In April this year the 1 per cent exit charge cap was introduced for retirement savers with personal pensions.
The latest crackdown on charges for occupational pensions affects those in both defined contribution pensions – schemes where pensions are calculated on the amount of money put in – and defined benefit schemes, where pensions are calculated based on a worker’s salary and years of service.
Justin Modray, founder of Candid Financial Advice, says: ‘Charges of 5 per cent or more are just a rip-off – and in some cases daylight robbery when providers have charged as much as 40 per cent to escape their clutches. The slate should be wiped clean and all charges should be abolished.’
The financial adviser points out that the reason charges were so high is largely due to the huge levels of commission paid out to salespeople when such pensions were sold more than a decade ago.
As part of the pensions freedoms introduced a couple of years ago savers in defined benefit employer schemes were able to transfer funds to personal plans and access their pots from the age of 55 – rather than be tied to their schemes’ rules and a retirement age that was usually 65.
Employers struggling to meet the growing costs of gold-plated workplace pensions have been offering juicy sums to tempt savers to leave these schemes. Examples include some being offered £1million lump sums instead of a guaranteed retirement income of perhaps £24,000 a year.
Yet experts warn such tempting amounts should often be rejected as they may not compensate for the loss of a healthy income for life. There are fears that reducing the cap on exit charges might add another incentive to take this cash. A Department for Work and Pensions spokesman says: ‘We wish to encourage people to have the ability to make decisions for themselves.
‘But it is particularly important for those in occupational pension schemes to seek independent financial advise before making any decision if they are considering transferring workplace pensions.’
The Pensions Minister Guy Opperman believes the cap on early exit charges will give savers greater control over their retirement planning.
He says: ‘I am pleased we are cracking down on the unfairness that forced people to pay higher than necessary penalties for accessing their own cash.’