Early exit charges for existing pension schemes are to be capped at 1% from 2017.
The cap aims to ensure that individuals over the age of 55 who wish to take advantage of the pension freedoms are not unfairly penalised for accessing their savings early.
The Department for Work and Pensions (DWP) is set to cap early exit charges for existing occupational pension schemes at 1%, and at 0% for any new contracts.
The cap for occupational schemes is due to come into effect from October 2017. It will be regulated by The Pensions Regulator (TPR).
The government will consult on the regulations in early 2017.
The Financial Conduct Authority (FCA) will impose a cap on early exit charges for contract-based personal pensions, including workplace personal pensions, from 31 March 2017.
For existing schemes, the cap will be set at 1% of the value of a member’s benefits being taken, converted or transferred from a pension scheme.
Early exit charges that are currently set at less than 1% will not be allowed to be increased. No early exit charges can be applied to contracts entered into after the new rules come into effect.
The FCA ran a consultation on capping early exit charges for personal and stakeholder pensions between 26 May and 18 August 2016, and the DWP ran a consultation on capping early exit charges for members of occupational pension schemes between 26 May and 26 August 2016.
Richard Harrington, minister for pensions, 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. This new cap will protect people’s savings from excessive charges, so more of their money will go towards the comfortable retirement they have saved for.”
Christopher Woolard, executive director of strategy and competition at the FCA, added: “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 charges from accessing pension pots.”
Nathan Long, senior pension analyst at Hargreaves Lansdown, said: “The capping of early exit penalties at 1% is a huge step in the right direction. The 147,000 people aged over 55 who were facing exit penalties in excess of 5% will be relieved that they are now able to transfer to a more modern pension now the shackles have been released.
“It remains important to be vigilant when transferring pensions, as 1% could still be a chunky sum to lose from your pension at the point of retirement. There are also hundreds of thousands of people with large exit penalties under the age of 55 for whom the exit penalty cap will not help with pre-retirement consolidation, so it pays to be aware especially with older-style pension plans.”