Government confirms 'level playing field' on pension exit charges by October 2017

Capping charges in this way will "ensure people are not unfairly penalised for accessing their savings early" in order to take advantage of the pension freedoms, the government said in a statement.

The charge cap will be overseen and enforced by the Pensions Regulator, mirroring the work of the Financial Conduct Authority (FCA) for personal and stakeholder pensions, according to the announcement. However, the FCA's cap will be introduced six months earlier, on 31 March 2017.

"We are restoring fairness and creating a level playing field in a system that has favoured the interests of providers over consumers for too long," said Richard Harrington, the government's pensions minister. "The new cap will protect people's savings from excessive charges, so more of their money will go towards the comfortable retirement they have saved for."

However, pensions expert Simon Laight of Pinsent Masons, the law firm behind Out-Law.com, said that the legal cap was further evidence of "price regulation becoming the norm" in the pensions market.

"State interference is pushing up the cost of doing business," he said. "No wonder we are beginning to see providers pull out of some parts of the market."

Once the charge caps are fully in force, pension providers will be required to limit early exit charges to 1% of the total value of the pension pot. Those providers whose charges are already below the level of the cap will not be permitted to increase them. The FCA's final charge cap rules also ban exit charges entirely on new contracts entered into after 31 March 2017, and the government intends to adopt the same position for occupational schemes.

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. These charges could amount to as much as 5% of the value of the pension pot in some cases.

The new rules are intended to address concerns that these charges discourage savers from taking advantage of last year's changes to the pension tax rules, which gave those with defined contribution (DC) pensions more flexibility over how they could access their savings from the age of 55.

The 1% charge cap will not be extended to those aged under 55, including those eligible to access their savings early on ill health grounds, according to the FCA's final rules, published this week. This is because the FCA's duty to cap charges as defined by legislation only applies to those who have reached "normal minimum pension age", according to its policy statement. However, it will apply to those with occupation-specific "protected" pension ages below the age of 55.

The FCA said that providers tended to waive charges when people were accessing their pensions early for reasons of ill health or disability. It will "reconsider" this policy "should evidence emerge that our understanding is incorrect or that firms are changing their behaviour in respect of these consumers as a result of the cap", it said in its policy statement.