New Government consultation aims to prevent extortionate pension freedom charges
2015 has been the year of ‘Pension Freedom’ and since the Chancellor relaxed the rules allowing people to get wider access to their pension funds (after retirement age of course), it has proven decidedly popular with the populace. However, insurance companies, being money-grabbing so and sos profit-driven, seem to have taken pension freedom as an opportunity to take liberties with your money, with some charging extortionate amounts to allow the shackle-free access envisaged by the Government.
As a result, the Government has decided to investigate. Yesterday, the Treasury launched an immediate consultation to look at whether exit charges could be cut or capped for those looking to access their pensions early, and to find out “how to remove other barriers that may be stopping people enjoying the benefits of increased flexibility over their pension pot.” There’s even an online survey for ordinary folks to let the Government know what they actually think. Which is new.
The Treasury say that both the Chancellor George, and Work and Pensions head honcho Iain Duncan-Smith have “raised concerns” that some insurance companies are “failing to play their part in making pension freedoms available to savers.” You don’t say.
In fact, our friends over at Which!!! have already crunched some numbers by examining the fees charged by 18 providers. They found that someone with a pension pot of £50,000, taking 4% a year through income drawdown, could be over £3,000 better off over 10 years if they used the cheapest provider, Fidelity (£4,993), rather than the most expensive, The Share Centre (£8,100). The difference is even more marked for someone with a larger pot of £250,000, withdrawing 6% a year, who could face charges anywhere between £16,325 (LV), and £26,490 (Scottish Widows) over the same period- a difference of more than £10,000.
The new consultation will look at how best to remove barriers and in particular will investigate:
options to address excessive charges for early exit penalties. This includes the option to impose a legislative cap on these charges for those 55 or over if there is sufficient evidence
how the process for transferring pensions from one scheme to another can be made quicker and smoother
how we can ensure that there is greater clarity around the circumstances in which someone should seek financial advice
The consultation will run for 12 weeks and a response will be published in the Autumn. The online survey will run alongside the consultation for 12 weeks and will form part of the government’s response.
Which!!! executive director Richard Lloyd said, “The old annuity market failed pensioners miserably and the government must ensure the same thing doesn’t happen again with drawdown. With such big differences in cost, and confusing charges that make it difficult to compare, it’s clear more needs to be done to help consumers make the most of the freedoms.”
“We’re campaigning for a cap on charges for drawdown products sold by someone’s existing provider to ensure people get good value for money.”
Of course, capping fees is one way of making sure insurance companies don’t take the Mickey when pensioners want to be flexible with their pension pot, but the danger of setting a cap is that companies might decide not to offer the flexibility that consumers want- insurance companies are at liberty to do this and some have already made their stance