City Watchdog To Scrap ‘Rip-Off’ Exit Fees

Legal Expert Praises Clampdown On Old Style Pension Arrangements

04.03.2016

Kate Rawlings, Press Officer | 0114 274 4238

A legal expert from law firm Irwin Mitchell has warned that while compulsion in terms of passing overriding legislation may be difficult, the Financial Conduct Authority (FCA)is right to “force”  pension providers to do more to help consumers unlock their old style pension arrangements. 

It is believed that over two million people who are locked in ‘rip-off’ pensions could be given a free exit after the City watchdog promised a fairer deal for savers.

The move comes after figures released by the FCA revealed annual fees on pensions, some as high as 7pc were destroying the value of pension pots.

But savers were unable to move their money to better deals - or withdraw and spend the cash - without paying expensive penalties.

A two-year study undertaken by the FCA revealed millions of people faced losing up to half of their life savings if they tried to exit before a specific 'retirement age'.

In some cases exit penalties were found to be cutting the value of a £100,000 pension pot to just £50,000.

According to the study, one in three people who were sold pension plans in the Seventies, Eighties and Nineties are now being hit with the fees as they try to access their money and pension providers have been accused of failing to spell out the costs.

The FCA has ordered all pension providers to 'cap or remove' these penalties and companies will be asked to prove that the charges are still fair. 

If they cannot, the companies will have to scrap the fees or reduce them to a level that the regulator thinks is reasonable. Pension companies will also have to make the charges clear to their customers.

Firms could face fines and savers could qualify for compensation.

Pensions expert and Partner at law firm Irwin Mitchell, Penny Cogher, said savers deserved fairer and better deals when it comes to exit fees.

Expert Opinion
The insurers and providers have, over the years, generally shown themselves to be non-responsive to anything other than compulsion and often through overriding legislation, so again this seems to be the likely way forward.

One reason the Government introduced Freedom and Choice for pensions in 2014 was because of its frustration over the industry’s lack of change as regards annuities.

That said, the industry wasn’t fully ready in April 2015 when Freedom and Choice was first implemented and there are many in the industry that are struggling to get their current main stream pension products as flexible as possible given all the new permutations.

This accounts in part for the fact that the industry have been reluctant to look at their older pension arrangements and products to work out what changes are needed there. However, taking away unfair penalties and exit charges should be simple and quick to do and the best solution for consumers.

It would be far more difficult to try to bring these older pension arrangements and products into line with the new flexibilities.

As this is harder to achieve it does seem more straightforward to allow consumers a proper choice where they’re not penalised in terms of exit charges and penalties in doing so - as to whether to transfer their pension benefits out of these old arrangements and products into the new products and go forward from there, rather than trying to update many thousands of pension policies with restrictions, penalties and bonus entitlements which don’t work very well in a flexible access environment.

Obviously in terms of reputation it is far better that the industry responds promptly to the FCA’s call by prompt and full self-regulation.”
Penny Cogher, Partner