Joined-up thinking has presided in the FCA’s latest move to cap early exit fees on new pension contracts. Barriers to pension freedoms are being removed for individuals aged 55 or older – also for the small minority with protected and early retirement ages. It will now be a simpler decision for individuals to take advantage of the freedoms which came into being in the 2015/16 tax year.
The ruling has been relatively painless and swift. It is reassuring that the issue of ‘inclusion’ remains high on the regulator’s agenda: those eligible for the Government’s reforms will not be obstructed. In February, the Treasury concluded that large numbers of individuals faced early exit charges at levels that presented ‘a real barrier’ to accessing the freedoms. The new rules will come into force from 31 March next year.
Early exit charges will be capped at 1% of the value of benefits being taken, converted or transferred from existing contract-based personal pensions. These include workplace personal pensions.
Exit charges on new pension contracts are being banned altogether. A 0% cap for new contracts prevents the emergence of early exit charges in the future. The FCA has also clarified that a customer with an existing contract will not face an exit fee if he or she opens and transfers to a new policy.
Critics have implied that the cap could inadvertently sway advisers to recommend clients to exit pension products. Clearly, inappropriate switching of pensions would not be a failing of the cap but a complete and utter failing of the adviser. Good advisers act according to what is in the best interests of their clients. Recommendations about pension choices are borne out of far more considerations than exit charges.
The Retail Distribution Review (RDR) effectively removed the justification for exit charges in new pension contracts, yet the FCA calculates the new charge cap will cost pension providers £46m-£89m in the four years following its introduction. Providers’ balance sheets may be being hit hard by the tidal wave of regulatory change in the financial services sector but it is becoming increasingly clear that good housekeeping and fairness towards consumers are at the top of the FCA’s agenda.
That the regulator is trying to foster a culture of access and inclusion throughout retail financial services is indisputable. Capping early exit charges is central to this movement.