The amount charged to people who want to withdraw or transfer money from their pension early could be capped at 1% from 31 March 2017, if plans to do away with hefty exit charges are given the go-ahead.
The Financial Conduct Authority (FCA) has today launched a consultation designed to benefit people wishing to make use of 'pension freedoms'.
Launched in April last year, the pension freedoms give savers aged 55 and over more flexibility to use their pension pot how they wish, rather than being required to buy an income called an annuity.
The FCA has proposed that for existing contract-based personal pensions, including workplace personal pensions, exit charges will be capped at 1% of the value of a member's pot.
There'll be no exit charge at all for personal pension contracts entered into after the proposed new rules come into force, which if everything goes to plan is expected to be at the end of next March.
Get Our Free Money Tips Email!
What's sparked the move to introduce a cap?
Around 400,000 pension pots have so far been accessed under the pension freedoms. However, some people have had to pay charges of between 5% and 15% (there have even been cases where exit fees have been almost 50%) of the total amount being withdrawn, to pocket their money or move it to a different pension fund.
FCA data released last year showed 670,000 people aged 55 or over potentially faced an early exit charge. Of these, 358,000 faced charges between 0% and 2%, 165,000 faced charges between 2% and 5%, 81,000 faced charges between 5% and 10%, and 66,000 faced charges above 10%.
The FCA also found that while the majority of customers don't end up paying early exit charges, 26,000 savers under 55 and 13,000 over 55 paid over £5,000 in early exit fees.
So that's why they could introduce a cap then?
In short, yes. Speaking in the House of Commons in January (when plans to introduce a cap were first announced), Chancellor George Osborne said: "The Government isn't prepared to stand by and see people either ripped off or blocked from accessing their own money".
Commenting on the consultation launch today, Christopher Woolard, director of strategy and competition at the FCA, said: "Together with the ban on exit fees in future contracts, we are proposing a 1% cap on exit charges in existing contracts to ensure people can access their pension pots without being deterred by charges.
"This is an important step so people feel able to access their pension savings should they wish to."
The consultation paper launched today and comments must be submitted to the FCA by 18 August 2016.
The FCA will then consider feedback and subject to legislation and assuming it's appropriate to do so aim to publish a policy statement confirming final FCA handbook rules this autumn, with a view to these rules coming into force on 31 March 2017.