Pension transfers and early exit charges: The government consults

In our recent blog about the Budget, we mentioned that the government had announced it would consult on ways of making the process for transferring pensions from one scheme to another quicker and smoother, including examination of barriers to transfer. The government has now published a consultation paper: Pension transfers and early exit charges.

The government notes that, in April 2015, it removed the requirement to use DC pension savings to buy an annuity and introduced a range of new options, designed to give members greater freedom and choice as to how they access their DC pension savings. At the same time, and in recognition of the fact that schemes were not obliged to offer members access to all of the new retirement options, the government strengthened the statutory right to transfer DC pension savings. Since April 2015, DC members who cannot access the retirement option they want in their existing scheme have a statutory right to transfer (switch) their pension savings both up to and beyond their normal retirement date.

However, experience to date suggests there are a number of barriers to transfer. As such, the government is “seeking 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”.

In relation to early exit penalties, the paper confirms that these are 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 also confirms that these commonly apply to policies set up 20 or 30 years ago. The government recognises that early exit charges can be perfectly valid. Its focus is on ‘excessive or disproportionate’ charges. If there is evidence of these, the paper identifies three options to address them and invites alternative suggestions: 

• A legislative cap on early exit fees for people aged 55 and above. This would be a fixed percentage of the fund value or a capped monetary amount.
• A more flexible cap. This might be a cap that only applied to certain components of an exit fee.
• A voluntary approach. This would allow the industry to take the lead in restricting early exit fees.

In relation to the process for transferring pensions from one scheme to another, the paper highlights the statutory transfer process for transfer from DC to DC and from DB to DC. The government invites suggestions as to how the transfer process could be made quicker and smoother, recognising that the desire to do this needs to be balanced against the need to “ensure that members do not become victims of pension scams and … understand the implications of the decisions they are taking”. The paper also asks for evidence of schemes not accepting transfers in or putting in place procedural barriers to transfer in and invites views on the idea of ensuring that (at least DC) members can transfer their benefits if they want to.

In relation to the circumstances in which someone should seek financial advice, the paper refers to the new requirement for a member to take advice from a ‘pensions transfer specialist’ before transferring safeguarded (normally DB) rights worth more than £30,000. It asks 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. It highlights the case of an IFA advising against transfer, but the member still wanting to proceed.

Finally, the paper confirms that the Financial Conduct Authority and the Pensions Regulator are gathering evidence in relation to the scale and amount of early exit charges, the process for transferring pensions and the way that the requirement for members to take financial advice before transferring safeguarded rights is being applied. It confirms that the government will consider this evidence before deciding what action to take.

The paper recognises that “this will be a period of transition and schemes and providers will need time to adapt their systems and processes to the new landscape”. This seems a welcome recognition of the challenge, for all, of adjusting to the new DC freedoms. The consultation closes on 21 October 2015.