The amount charged for early withdrawals or transfers from pension pots will be capped at 1% from 31 March 2017, while new pension contracts entered into after this date will face no early exit charge at all. This means many savers will pay £1,000s less to remove their current pension cash.
The Financial Conduct Authority (FCA) has today confirmed that early exit charges for moving a lump sum from an existing pension pot will be capped at 1% and that firms already charging less than 1% will not be able to raise their fees in line with the cap.
This move follows the launch of new 'pension freedoms' in April last year, which allow savers aged 55 or over more flexibility to use their pension pots how they wish, rather than being required to buy an income called an annuity.
Previously, pension holders have faced early exit charges when taking money out of their pension pots, with some people facing fees of between 5% and 15% of the sum total of the pot.
So for example, if you've got £50,000 stashed away in your pension pot, the most you'll be paying for an early withdrawal will be £500 from 31 March 2017. But previously you may have been asked to part with as much as £7,500 (by companies that operated a 15% early exit charge).
In addition to the 1% cap on early exit charges from existing pension pots, companies will be forced to scrap early exit charges altogether for pension contracts entered into after 31 March 2017.
Christopher Woolard, executive director of strategy and competition at the FCA, says: "People eligible for the Government's pension reforms should feel able to access them as they wish. The 1% cap on early exit charges for existing pensions and the 0% cap for new contracts will mean that current and future savers will not be deterred by these changes from accessing their pensions pots."
Why bring in the cap on early exit fees?
The FCA first published a consultation paper on capping early exit charges in May this year, which outlined its proposals for capping fees and asked for feedback. The rules were then finalised in line with the responses to the consultation.
In May, it was calculated that around 400,000 pension pots had been accessed under the pension freedoms. However, the fees charged for early access varied significantly.
FCA data released in 2015 found that 670,000 people aged 55 or over potentially faced early exit charges. Of these, 358,000 faced charges of up to 2%, 165,000 faced charges of 2% to 5%, 81,000 faced charges of 5% to 10% and 66,000 faced charges of above 10%.