Pension transfers and early exit charges - the government’s response

In July 2015, the government announced a consultation on pension transfers and early exit charges. In our article on that consultation, we explained that, in April 2015, the government extended the statutory right to transfer DC pension savings to ensure that DC members who could not access the new retirement freedoms in their existing pension plan could choose to transfer their savings to a new arrangement at any time before or after their normal retirement date. The purpose of the July 2015 consultation was to seek “responses on options to address possible barriers to people switching their pensions to access the new freedoms, including excessive early exit penalties, the process for transferring pensions from one scheme to another, and the circumstances in which someone should seek financial advice”.

The government’s response to the consultation has now been published. In this article, we consider the key points coming out of that response.

Early exit penalties

The July 2015 consultation had confirmed that early exit penalties were fees/charges incurred “when a customer transfers out of their pension into another fund or scheme, or otherwise accesses their pension flexibly before a date specified” (usually an agreed retirement date specified) in the pension contract or scheme rules. It identified three options to address penalties, including a legislative cap and a voluntary approach which would allow the industry to take the lead, and invited alternative suggestions.

In the consultation response, the government recognises that a legislative cap on early exit charges “could set an undesirable precedent for intervention in a company’s property rights”. However, it concludes that in this case “such action is warranted in order to ensure that individuals are able to access their pension savings under the new freedoms”. For contract-based schemes, the Financial Services and Markets Act 2000 will be amended to give the Financial Conduct Authority a duty to set rules requiring firms to limit early exit charges to rate(s) set by the FCA. The Financial Conduct Authority should implement its duty to cap before the end of March 2017. The Pensions Regulator will work alongside the FCA as it implements a cap, to ensure that any concerns for trust-based schemes are addressed.

Process for transferring pensions from one scheme to another

The July 2015 consultation highlighted the statutory transfer process and invited suggestions as to how the transfer process could be made quicker and smoother for those with DC savings, including the possibility of a separate transfer process for DC savings.

The idea of a separate transfer process for DC savings is not going to be taken forward. However, the consultation response notes that, whilst transfer times between contract-based schemes are quite quick, the times for trust-based schemes are slower. To help to address this, the Pensions Regulator has been asked to include guidance on transfers in the best-practice guidance that it is preparing to accompany the new DC Code. A new reporting regime will also be introduced. To help individuals to understand the transfer process, Pension Wise is going to prepare a pensions transfers ‘roadmap’. 

Circumstances in which someone should seek financial advice

The July 2015 paper referred to the requirement for a member to take advice from a ‘pensions transfer specialist’ before transferring safeguarded (normally DB) rights worth more than £30,000. It asked for feedback on the impact of this requirement and how the process for taking advice could be made quicker, smoother and clearer for members, firms and advisers. The consultation response confirms that the government and the FCA are considering the responses and evidence received in the separate Financial Advice Market Review, and will set out recommendations “around Budget 2016”.