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Excessive pension exit fees to be capped, says government

savings jars Image copyright Thinkstock

People who withdraw money from their pension funds could see their charges reduced by hundreds of pounds, under new laws planned by the government.

The Treasury has confirmed that "excessive" exit fees charged by some pension providers will be banned.

The precise level of the cap will be set by the Financial Conduct Authority (FCA), after a public consultation.

The chancellor, George Osborne, told the House of Commons that as many as 700,000 people faced such penalties.

"The government isn't prepared to stand by and see people either being ripped off or blocked from accessing their own money by excessive charges," he told MPs.

The news comes as speculation grows over other major changes that may be made to pension taxation in this year's Budget. These are likely to affect the amount of tax relief granted to savers.

'Financial bondage'

Pensions minister, Baroness Altmann, has previously said that up to 40% of a pension's value can be lost in fees.

She said that such policies would never have been sold, had customers understood the hefty exit penalties.

Since April 2015 anyone over the age of 55 has been free to withdraw as much money as they like from their pension pot, subject to income tax.

The news was welcomed by pensions experts.

"In some cases these penalties can run to hundreds or even thousands of pounds," said Tom McPhail of Hargreaves Lansdowne.

"This kind of financial bondage has no place in the 21st century."

Image copyright Thinkstock

Reforms

Most of the policies with large exit fees date from the 1980s and 90s. The industry has said that no policies are currently being sold with such charges.

"More than eight out of ten customers do not have to pay early exit charges to access their pensions," said Dr Yvonne Braun, of the Association of British Insurers (ABI).

"Where they do, most fees are below 5% and were put in place decades before the freedom and choice reforms were introduced."

The Treasury said that 66,000 people over the age of 55 face currently face charges worth more than 10% of their pension pots.

Such investors are being advised to consider holding back on withdrawals until the reforms are in place.

However, it could be as much as two years before the new law is passed.

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