Next month sees the introduction of the long awaited ban on unfair exit penalties applied to pension funds. The Financial conduct Authority (FCA) believe that around 147,000 people have penalties of over 5% applying to their pensions should they take the benefits before their normal retirement age or should they transfer to a better provider. In recent years, we have seen penalties of up to 30% on the value of the fund applied by certain pension companies.
The regulator isn’t banning exit penalties completely, but instead putting a cap on the penalties of 1% of the fund value. Pension companies that currently charge less than this will be banned from increasing their fees to 1%. The FCA expect the ban to save consumers up to £89m in fees over the next 4 years with up to 20% of all pensions benefiting from the cap on charges.
Pensions Minister Richard Harrington said ”We are restoring fairness and creating a level playing field in a system that has favoured the interests of providers over consumers for too long”. The change will take place from 31st March for personal pension plans and in October for trust based company pension schemes.
This means that anyone over the age of 55 who is thinking of transferring their pension to another provider or taking benefits, would be better to wait until April if there is currently an exit charge being applied. One thing to watch out for is that we have seen many pension schemes recently that are taking far too much risk with the pension money. This may have paid off last year when shares rose so significantly, but 2017 is expected to be a volatile year for investments as the Brexit negotiations get going.
We tend to find that people focus too much on returns and not enough on the risks they are taking with their money. It is better to focus on not losing the money as you get closer to retirement but in our experience most people are still in the same share based funds as they approach retirement that they were in when they first started the pension 20 or 30 years ago. So if you are approaching retirement, pay particular attention to the risk you are taking and seek advice if necessary.
By David Hill - Chartered Financial Planner, 17th February 2017