What are pension exit fees?

Nobody wants to see their pension pot reduced for any reason when financial planning for retirement. Not only have they worked hard for the money, but their pension allows them to enjoy a more comfortable life. However, there is an issue that can cause their savings to be negatively impacted: pension exit fees.

What are pension exit fees?

Pension exit fees are imposed by some pension providers when customers withdraw their savings or complete a pension transfer to a different provider. This pension charge is imposed before a person can gain access to their pension, and the rate applied can differ depending on various factors.

Exit penalties were a more prevalent issue in the past. This is because the Financial Conduct Authority (FCA), in an effort to clean up this practice, made a number of changes that pension providers have to follow. The three main amendments the FCA made to their rules are:

• There is a 1% cap on exit fees for people aged over 55 (this increases to 57 from 2028). This 1% is taken from the overall value of the pension. For example, a 1% exit fee for an applicable pension of £100,000 would be £1,000.
• If a pension provider has a policy where the exit fees are already below 1%, they are banned from increasing their rates.
• If pensions were set up on 31 March 2017 or after this date, there is a full ban on providers charging exit fees.

Regarding the date in the third point, these changes came into action after 31 March 2017. For any older pensions that were created before this date, exit fees remain a concern. Yet after the FCA’s changes, exit fees have understandably begun to disappear.

Why do pension exit fees exist?

There are two main reasons why providers impose pension exit fees. The first reason is to get the most money they can out of customers. If they are not going to be in charge of your pension pot, they want to get as much out of it as possible before you leave. With early exit fees, they can get their hands on a sizeable portion of your pension, all without having to do any additional work.

The other reason behind the use of exit fees is to dissuade customers from moving to a different pension provider. If someone applies, for example, a 10% exit fee, customers will think twice before they decide to transfer over to a different provider or withdraw their pension. This is certainly the case if someone is already close to retirement or has only built a relatively small pension pot.

Factors that influence pension exit fees

There are different factors that influence the size of pension exit fees and when they are applied. These factors include your age when you attempt to withdraw or transfer your pension pot, how long you have been with a provider, and the rules set by the provider themselves.

The latter point is the main concern for customers. Even though work has been done to eradicate exit fees, they still exist with certain pensions. They can also dictate the size of the fee when working around the Financial Conduct Authority’s rules. For instance, there is a 1% cap on exit fees for anyone currently aged over 55, but that’s not stopping providers from ramping up that fee for those that are younger.

Conclusion

Retirement planning involves jumping over a few hurdles, and one of those is exit fees. If you are concerned that you could be hit with any costly exit fees, don’t hesitate to get in touch for expert guidance.

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The content of this article is for general information purposes only and should not be construed as legal, financial or taxation advice. You should not rely on the information contained in this article as legal, financial or taxation advice. The content of this article is based on information currently available to us, and the current laws in force in the UK. The content does not take account of individual circumstances and may not reflect recent changes in the law since the date it was created. It is essential that detailed financial and tax advice should be sought in both jurisdictions and any legal advice, if required.

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