FCA data shows 670,000 savers aged 55 or over hold over £22.5bn in old-style pension policies that levy a charge if they leave the contract before a pre-determined retirement date. £10.6bn of this will incur an exit penalty of 1% or more and £6.2bn will have an exit penalty of 2% or above, meaning the 1% cap could make a significant difference.
Early exit charge
0 <= 1%
1% <= 2%
2% <= 5%
5% <= 10%
10% <= 20%
20% <= 40%
Industry fund value
Previously the spectre of an exit penalty – which in some cases would wipe off more than 10% of the value of a person’s pot – may have been a barrier to switching to a more modern, lower cost pension plan.
However, for hundreds of thousands of investors the short-term pain of a 1% exit penalty will be worthwhile to benefit from lower annual charges in the longer-term.
Tom Selby, senior analyst at AJ Bell, says:
“Hundreds of thousands of savers chained to poor value pension contracts by huge exit fees could be unshackled from April this year. Anyone who has a policy with an exit fee should review it urgently because, in many cases, they will be able to get a much cheaper deal elsewhere.
“They will need to take care that they don’t give up any valuable benefits in their existing policy, such as a guaranteed annuity rate but now is definitely the time to dig out the policy documents and weigh up the pro and cons of a switch.
“While savers may be reluctant to absorb a 1% exit penalty in the short-term, even a relatively small reduction in annual charges could translate into a pension worth tens of thousands of pounds more in the longer-term.”
The table below shows how much more or less in investor would have if they switch pensions compared to staying where they are. It is based on switching £100,000 from a pension with a current annual charge of 1.75%, 1.5% or 1.25% and an exit penalty of 1%, to a new pension with a lower annual charge of 1%.
It assumes investment growth of 5% before charges are deducted and shows that the 1% exit penalty is quickly recouped by the additional positive return due to lower charges.