Sipp provider Dentons Pension Management has launched a stinging attack on the Government for legislating for a cap on exit penalties, saying such fees are due under the terms of the contract.
Dentons director of technical services Martin Tilley has accused the Government of pandering to tabloid journalists, and says a cap on exit fees could end up costing more than the savings it is intending to make.
But some industry figures have claimed exit penalties are getting in the way of pension freedoms and hindering people from shopping around for the best product when they come to retire. Sipp provider AJ Bell says almost half the financial advisers it has polled say customers have been restricted from shopping around by exit penalties.
Tilley says: “This is another example of an ill-informed government pandering to the messages from tabloid journalism. Trying to pass blame to the “rip off pension providers” who are simply imposing disclosed contractually due fees when it is the client who has broken the contract by leaving the contract early. The government seem unable to determine the difference between an exit charge and in some cases a market value adjustment, which is determined by paying out the true value of the underlying assets rather than a face value of units, as might be the case in a with profit fund.
“I’d be interested to see how the FCA are going to approach this as we enter into contract law. What I hope we don’t see is action taken that is actually more costly to implement than that which it seeks to address.
“The rush for the door was highlighted to the government in consultation before flexi access was implemented and they had the chance to address this issue before it became one, but making statements such as “all people will be able to access to their pensions” was a broad sound bite and should have been , “most people will be able to” or “all will be able to subject to their current plans”.
“Figures report that a minority of people are affected, that in a majority of cases the sums are not excessive and were perfectly well disclosed in product literature.
“Such statements and actions undermine the industry when the incentive to save through it should be a priority for the government.”
Intelligent Pensions marketing director Andrew Pennie says: “Care needs to be taken that legally binding contracts aren’t simply ripped up at the detriment of those savers who are not looking to transfer.
“However, removing unnecessarily excessive pension exit fees is a positive step and will help rebuild much needed credibility in the pension sector.
“It is impossible to say how much impact removing excessive exit fees will have on pension freedoms and encouraging retirees to shop around for the best retirement income solution. In the recent FCA findings, 58 per cent of drawdown investors and 64 per cent of annuity purchasers, remained with their existing pension provider. These figures feel way too high and hopefully the removal of excessive exit fees will be a catalyst for more people to shop around for the best retirement solution and seek regulated advice.”
AJ Bell chief executive Andy Bell: “This is a welcome move by the Chancellor. An early encashment penalty that gets in the way of someone accessing the pension freedoms feels wrong. We’d prefer to see a complete ban but a cap to prevent excessive charges is a big improvement on where we are today.
“45 per cent of financial advisers that we spoke to have clients that have been prevented from accessing the new pension freedoms due to early encashment penalties. The whole point of pension freedoms was to give people flexibility and choice, if you can’t offer your customers that, why should you be allowed to charge them an early encashment penalty if they want to transfer somewhere else?
“The main reason given for exit fees is to cover initial costs but you have to question whether it is reasonable to still be collecting charges for events that may have happened around a quarter of a century ago. It is debateable whether some exit fees really do relate exclusively to initial set up costs or whether they are actually about on-going provider profitability. In reality the charge was baked into the contract many years ago to ensure the provider made the requisite amount of money out of the product.”