Exit charges for those taking up pension freedoms to be capped at 1%, says FCA

The FCA also intends to ban exit charges outright on any personal pension contracts entered into after the new rules come into force, expected for March 2017, according to its consultation on the proposals. In a separate consultation, the Department for Work and Pensions (DWP) is consulting on mirroring the FCA's cap for occupational pension schemes "unless evidence emerges that differences between FCA regulated pension schemes and occupational pension schemes means a different cap is required".

The proposals published by the FCA are intended to give effect to the new legal power and duty to cap excessive exit fees, which it will have once the relevant section of the 2016 Bank of England and Financial Services Act comes into force. The government confirmed its intention to proceed with such a cap in January, as part of a package of measures designed to ensure that those seeking to access their pension flexibly once turning 55 were not being prevented from doing so.

Pensions and lifetime savings expert Simon Laight described the level of the proposed cap as "sensible".

"Generally, providers have accepted that high exit charges are not acceptable and many have already reduced their exit charges to the proposed new capped level," he said. "Likewise, banning exit charges completely for new contracts won't hurt the industry much - most modern contracts don't have exit charges."

"However closed book firms, which bought 'back books' assuming a certain level of charges income, will find the proposed rules difficult. They have paid money for an income stream, and now find that the government is retrospectively taking away part of that income stream. This is government interfering with firms' property rights in the name of public policy," he said.

The FCA intends to cap exit charges on existing contract-based and workplace personal pensions at 1% of the total value of the pension pot, and to ban exit charges entirely on new contracts entered into once the new rules come into force. Providers that impose charges below the 1% cap will be prevented from increasing their charges up to the level of the cap.

Historically, some pension providers have applied early exit charges to customers seeking to access their savings on or after the age of 55, but before their expected retirement date. Changes to pension tax rules which took effect last year gave those with defined contribution (DC) pensions more flexibility over how they could access their savings once turning 55, without incurring heavy tax penalties or necessarily having to buy an annuity.

Around 670,000 people with FCA-regulated pension products aged 55 or over were subject to an early exit charge before they could transfer out of their existing arrangements to exercise the pension freedoms, according to research conducted by the regulator last year as part of an information-gathering exercise. Of these individuals, the majority were charged 0.2% of the value of their pension pot, but 81,000 people faced charges of 5-10% and 66,000 were charged over 10% of the value of their pension pot, according to the figures.