UK government confirms cap on 'excessive' early pension exit charges

The level of the cap will be set and enforced by the Financial Conduct Authority (FCA), which will be subject to a new legal duty to cap "excessive" early exit charges, chancellor George Osborne told MPs in the House of Commons. Further details about the new duty will be published as part of the government's response to the Pension Transfers and Exit Charges consultation, which ran between July and October last year.

Osborne told MPs that the government was not "prepared to stand by and see people either ripped off or blocked from accessing their own money by excessive charges". Nearly 700,000 members of contract-based pension schemes are eligible for some sort of early exit charge, which in a "significant minority" of cases are high enough to effectively put people off from accessing the pension freedoms, according to FCA research.

"We’re determined that people who've done the right thing and saved responsibly are able to access their pensions fairly," he said.

Pensions law expert Carolyn Saunders of Pinsent Masons, the law firm behind Out-Law.com, said that the planned cap was "welcome news for consumers" and would support the government's policy of "giving individuals a greater sense of control over their pensions".

"But for providers, this represents yet another change to the terms of their relationships with their consumers," she said. "Although not as radical as the adjustments resulting from the introduction of the pension freedoms, it is another step along the road to making the private provision of pension products more like a public service."

Since the law changed in April 2015, almost 400,000 pension pots have been accessed flexibly, according to government figures. The new rules gave members of defined contribution (DC) pension schemes more freedom to access their savings in any way that they wish once they turn 55, without incurring heavy tax penalties or necessarily having to purchase an annuity.

An information-gathering exercise conducted by the FCA alongside the government's consultation found that 670,000 contract-based pension scheme customers aged 55 or over, or 16% of the total, faced some sort of early exit charge. The charge was 5% or lower in the vast majority of cases, but 81,000 faced charges between 5-10% and 66,000 faced charges of over 10%, according to the FCA.

The Pensions Regulator, which regulates trust-based pension schemes, was asked to conduct a similar information-gathering exercise as part of the consultation process. The government is due to publish its response to the consultation, which also looks at ways of making the process for transferring pensions from one scheme to another quicker and smoother, shortly.