The Financial Conduct Authority (FCA) has now entered into a consultation period (the Department for Work and Pensions (DWP) is conducting its own consultation) on its proposal to cap pension exit charges at 1 per cent on existing plans and introduce a total ban on exit charges for new pension plans.
A cap would undoubtedly be seen as a victory for the consumer lobby and politicians, but who would set to lose out and what impact would the capped charge have?
The consultation only covers capped exit charges for those accessing pension freedoms. Already, people are questioning the fairness of high charges, and why those below age 55 who may want to transfer their pension to a more appropriate and beneficial contract still face having to pay higher charges.
Perhaps the proposals highlight the desperate and determined nature of the government and regulator to make pension freedoms a success and a future vote winner – pension freedoms simply have to work.
A key part of making that happen is to build credibility in pensions and the financial services sector and encourage people to take advice and shop around for the best retirement income options. If the cap on exit charges is to the consumer’s benefit, this will clearly be beneficial to achieving those goals.
Clearly, the implication of the proposals is that insurance companies are ripping off money from customers who simply want to benefit from the new pension freedoms. Removing unnecessarily excessive exit penalties must be seen as a positive step and will help improve credibility in pensions. @Image-cee2d02a-60c2-40ab-abe1-8e4634c2d81c@
But in the majority of cases, exit penalties are not a gratuitous attempt to rip off customers, but actually reflect the legal structure and nature of the underlying pension contract.
Encouraging people to save over the longer term has always been a challenge. People naturally prioritise their short-term needs and, without persuasion, are unlikely to commit to long-term savings, such as pension plans. This was the reasoning behind the introduction of auto-enrolment – instead of encouraging people to join, they are automatically enrolled, and they have to take action to opt out.
| Key Points |
The FCA has now entered into a consultation period on its proposal to cap pension exit charges at 1 per cent on existing plans. Encouraging people to save over the longer term has always been a challenge. The key focus of this consultation is to improve people’s ability to transfer to access pension freedoms. |
Provided opt-out rates remain at the current low rate, auto-enrolment will be viewed as a successful means of closing the savings gap and overcoming the barrier of people making the necessary long-term retirement savings of their own volition.
Before we had auto-enrolment, providers needed salesmen to persuade the public to buy long-term savings products. Salesmen in turn needed to be incentivised to do a good job and sell their companies’ products, or, for independent advisers, to sell the best products in the market.
To pay a sales commission to an adviser, the product providers had to effectively fund the payment up-front, then recoup the cost over the life of the policy. There was no other way of incentivising the salesmen to incentivise the customers.
