If you want to take money out of your pension, using the pension ‘freedoms’ you may have to pay an exit fee. The regulator says that pension exit fees will be limited to 1%.
Q. What are exit fees?
A. Exit fees are imposed by some pension companies if you want to take money out of your pension before the date you originally planned to retire. You might also be charged an early exit fee if you wanted to transfer your pension to a pension company that would let you get access to your money in a more flexible way.
If your money is invested in a ‘with-profits fund’ (which is designed to smooth out the ups and downs of the stock market), you are likely to be charged what’s called a market value adjustment (or MVA) if you cash your pension in or take money from it.
Q. Do many pension companies charge exit fees?
A. According to the Association of British Insurers (ABI), which represents the pension companies, over eight out of ten people who have a pension don’t have an early exit fee.
If you have a pension that you took out some time ago, you’re more likely to be charged an exit fee. The regulator, the Financial Conduct Authority (FCA) carried out research which showed that almost 700,000 people who were in what’s called ‘contract-based pensions’ would be charged an exit fee if they wanted to take money out of their pension early.
SAVVY TIP: Ignore the jargon! A ‘contract-based pension’ just means that it’s a pension you take out directly with the pension provider – either as a personal pension or as a workplace scheme. With other workplace pensions (called ‘trust-based schemes), a trust is set up to run the pension.
Last year I contacted a number of the large pension companies to find out what charges they impose and how much flexibility you have about how you take money from your pension.
Although most of them said they didn’t have a specific charge for when you took money out of your pension using pension freedoms, several imposed a charge if you transferred your pension to another product or provider (which you might need to do in order to take money out of your pension in small amounts).
Q. How high are exit fees currently?
A. Exit fees are normally charged as a percentage of the amount of money you’ve invested in your pension. The regulator, the FCA’s investigation found that, of the 670,000 people who had pensions that imposed an early exit fee, around 350,000 had pensions that charged between 0% and 2% in early exit fees, 165,000 had pensions that charged 2-5%, approximately 80,000 had pensions that had an early exit fee of 5-10% and over 60,000 people had pensions that charged more than 10% by way of early exit fee.
Q. Will all exit fees be scrapped?
A. Exit fees will be scraped entirely for people who take out a new pension contract after these rules are introduced. The change will be introduced in March 2017. For any existing pension plans, the regulator will force pension companies to cap exit fees at 1% of the value of the money being transferred, but companies would be able to charge less than this.
Q. Could it mean higher charges for those who leave their money in the fund?
A. It’s definitely possible that those who leave their money invested in their pension may pay more, if early exit fees are capped, but it’s not guaranteed.
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