LONDON (Reuters) - Britain’s finance ministry said on Tuesday it would introduce legislation to cap “excessive” exit fees charged to pension-holders who choose to withdraw their cash early, following pensions reform designed to allow easier access to the cash.
The reforms introduced last year have allowed over-55s more freedom over what to do with their pension pots, removing an obligation to buy an annuity, which provides a fixed income for life.
But some policyholders have faced hefty fees for accessing their cash, depending on the structure of the pension products.
“The independent FCA (Financial Conduct Authority) will be responsible for setting the level of the cap and will consult fully in due course,” the Treasury said in a statement.
The Treasury’s decision follows a consultation last year.
Industry specialists said exit charges could sometimes be high, at 5 percent or more of the value of a policy, compared with a more typical 1 to 2 percent.
But they said this generally applied to older-style pensions, which charged high exit fees to make up for low upfront charges.
“There used to be back-end charging on pensions to get people to buy them,” said Noleen John, insurance consultant at law firm Norton Rose Fulbright.
“A lot of the exit charges were to pay what insurers paid at the outset.”
Reporting by Carolyn Cohn; editing by Simon Jessop and Susan Thomas