The Government issued a consultation during the summer, seeking the views of pension specialists regarding potential barriers to individuals taking advantage of the new pension freedoms and on the circumstances in which individuals should take financial advice. At the same time it issued a survey for individual consumers to share their experience of accessing the new freedoms and the Financial Conduct Authority and the Pensions Regulator gathered evidence on the level of early exit charges and on the processes for pension transfers.
The Government had previously concluded that it would be disproportionate to require all DC pension schemes to offer the full flexibilities within their scheme; however, it is keen to ensure that all individuals with DC savings can access the flexibilities – either directly from their scheme or by transferring to another arrangement – without undue cost or delay. In the consultation paper the Government makes clear that, if it finds evidence of “excessive” early exit charges being levied on individuals, it will seek to impose a cap on such charges as they relate to individuals over age 55.
Early exit charges
The consultation notes that early exit charges arise when an individual seeks to transfer out of his pension arrangement before his agreed retirement date and that they arise as a result of administrative costs to the provider, other charges related to the disinvestment of assets and/or the recovery from members of an initial commission payment paid previously to an adviser. As long as the charges are designed purely to cover such costs they should not be deemed excessive but the Government wishes to establish whether this is actually the case.
The Government does not include Market Value Adjustments (MVAs) or the loss of a terminal bonus within the definition of early exit charges, since these are regarded as integral features of a long-term contract and, in particular, terminal bonuses are not guaranteed.
The Government notes that many of the schemes that levy early exit charges date back to the 1980s and 1990s. While more modern schemes are less likely to levy such charges, many individuals still have savings in these legacy schemes.
In case the Government finds evidence of excessive early exit charges, it has suggested three methods of addressing this:
- imposing a cap on all early exit charges, either as a percentage of the member’s fund or as a monetary amount,
- a flexible cap that might apply to a certain type of charge or to funds over a certain level or
- allowing the industry to develop a voluntary approach to limiting charges.
Pension transfers
The Government is keen to ensure that the transfer process is as quick and smooth as possible, so it is seeking views on how this may be achieved. It is reassuring to note, however, that it recognizes that trustees and pension providers require a certain amount of time to check the validity of the transfer and of the receiving scheme, to counteract pension scams.
Financial advice
The consultation notes that:
- there are reports of some firms requiring people with benefits worth less than below £30,000 to take advice before transferring;
- there may also be other cases where firms are requiring advice which is not required under pensions legislation, for example if an individual with flexible benefits opts for a drawdown product, and
- advisers who have advised their client not to transfer are reluctant to process the transfer if the client insists on going ahead, in case of potential future liabilities arising from the transfer.
The Government does not want the requirement for financial advice to become a barrier to individuals accessing the pension freedoms, so it (alongside the FCA and TPR) is seeking evidence of the extent to which advice is being required beyond the circumstances where the law requires it.
FCA’s pension freedoms data collection exercise
The FCA approached all providers of pension and retirement income products and their survey covered the following areas:
- consumer access to the freedoms,
- financial advice requirements and insistent clients (ie those who wish to pursue a course of action despite receiving financial advice against it),
- pension transfer procedures and
- exit charges.
The FCA found that over 200,000 pension policies have been accessed in the first 3 months since April. Between 80% and 90% of people could access their pension through drawdown or uncrystallised fund pension lump sum (UFPLS) without needing to change provider, although a majority had to transfer to a new contract within their existing provider to access their money in their preferred way. The FCA expects that many consumers will continue to need to transfer to a new contract when accessing their pension savings for some time yet.
Most providers, particularly the largest, require consumers transferring into their pension products from another provider to take advice; this goes beyond statutory requirements. Many consumers seeking to transfer their pension would find that their transfers were not accepted by a significant number of providers, particularly where they wished to transfer defined benefit (DB) pensions. Firms have the discretion not to accept transfers and 20% of providers do not accept transfers from DB pension schemes, with almost a third of all firms not accepting transfers from insistent customers. Only a quarter of providers said that they would accept transfers from DB pensions in all circumstances.
The average time taken to complete a transfer is 16 days and 84% of consumers eligible to access their pension savings are not charged on exit. However, at the other extreme, between 3% and 4% would face a charge of over 5%.
TPR’s survey on flexible pension access
TPR approached 226 trust-based pension schemes, made up of 217 single-employer schemes and 9 multi-employer master trusts. The 9 master trusts accounted for 47% of the total membership of the schemes.
Analysing transfer times by members, the average (mean) transfer time taken was 25 days, while the median was 11 days, implying that some transfers take significantly longer than 25 days.
A minority of schemes (11%) said that they apply an exit cost or charge to a member’s pot when he exercises an exit option. TPR notes that many schemes provide an initial withdrawal free of charge but levy a fee on subsequent withdrawals.
The next stage
The consultation closed on 21 October and the Government intends to issue its response in the Autumn.