The Daily Telegraph - Saturday - Money
‘The charges are so high it’s worth moving, even with the penalty’
Mr Brown’s financial adviser, Richard Earl of Cervello Financial Planning, said Old Mutual was guilty of a “massively ageist proposition”.
“They are discriminating against younger people. How is it fair that the 1pc cap is only for people 55 and over? This guy is turning 43, why should he be stuck waiting until the penalty drops? I don’t understand it at all. It is straightforwardly unfair”, he said.
Tom Selby, of AJ Bell, a pension provider said excessive exit fees like those Mr Brown is faced with should be “eradicated across the industry”.
He said: “It is frankly bizarre that we now have a situation where someone who happens to transfer their pension after age 55 has any exit penalty limited to 1pc, while someone under 55 is exposed to potentially limitless exit charges.
“The industry should be encouraging people to engage with their retirement savings and shop around for the best deal, not putting huge barriers in the way of people wanting to move their money.
“Clearly if extremely large exit penalties continue to be applied to pre-55 contracts, policymakers will need to seriously consider extending the scope of the cap to cover pre-55 transfers.”
The pension freedoms, announced in 2014 and applying from 2015, give anyone 55 and over the ability to take their entire pension as cash; make ad hoc withdrawals and leave the rest invested; buy an annuity, or a combination of all three. But many older contracts do not allow all the options, so customers have to transfer to make full use of the freedoms.
Mr Earl’s purpose in recommending that Mr Brown move his pension money was because of steep charges that were eroding the value of his savings.
In common with a lot of pensions set up 15 years ago or more, providers paid out commission to advisers who sold the policy in the first place. The practise was outlawed by the City Watchdog in 2013, but existing contracts containing so-called “trail commission” were honoured.
Until he stopped saving into the policy in 2016, Old Mutual Wealth paid commission from Mr Brown’s pension arising from a “bid offer spread” – the difference between the price you are charged to buy and sell units in funds – of between 5pc and 6pc on each contribution he made.
That charge was in addition to a 0.75pc annual management charge, a £5.07 per month fee when the policy was worth less than £50,000, as well as underlying fund costs.
Taken together, this equates to a 2.3pc annual charge. An all-in fee of 1pc is the norm today, so the savings Mr Brown could make by switching are considerable, especially as he is comparatively young.
Mr Earl said: “I truly believe that the compounded effect of these charges over an 18-year period have been penalty enough for this client without being subjected to a further 4.5pc transfer penalty.”
It is complex structures like this that campaigners say need to be dropped (see Tom Tugendhat MP).
In some cases, ongoing fees are so high that it may be worth switching to a cheaper alternative despite the exit fee.
Analysis from AJ Bell shows even with the 4.5pc exit charge, it would make financial sense to move to a cheaper policy after just four years.
By the time Mr Brown is 47 his current pension would be worth £341,979 assuming investment returns of 5pc. Under a new arrangement, with more typical annual fees of 1pc, it would be worth £342,759, despite the £14,000 exit penalty.
By aged 65 he would be £140,000 better off, the analysis shows.
With a 1pc cap, Mr Brown would be better off after just one year. The Financial Conduct Authority has said it is up to the Government to extend the fees cap to younger customers, and that this is not within its scope – but it is watchful of charges and “outcomes” for savers. Pension companies face the prospect of yet another crackdown by the FCA unless they better understand how their customers are faring. Six firms were referred to the watchdog’s enforcement division a year ago over their unfair treatment of long-standing customers.
Senior management at the providers – which included Old Mutual Wealth, as well as Abbey Life, Countrywide, Police Mutual, Prudential and Scottish Widows – were found “not to have a grasp” of how these customers were being treated.
They were exposed as having excluded important information, including the extra fees “paid up” customers were charged, and when valuable guarantees were at risk of being lost.
The review covered products sold pre-2000 by 11 firms who hold £153bn of savings in old-style policies. Why did the Government cap exit fees?
A damning 2013 report by the Office of Fair Trading, a now defunct consumer watchdog, warned the pensions industry was shortchanging savers with complex and high charges. It found nearly 1.4 million people were paying up to 26pc too much in charges because they were saving into schemes set up pre-2001.
The OFT commissioned more work to establish the extent of “exit penalties” levied by firms when
savers cash in or transfer their pension before a specified age.
That investigation found around £3.4bn of pension money faced an average 10pc exit charge.
The Treasury tasked the Financial Conduct Authority to set a cap on exit fees to apply from 55 and over. A 1pc cap takes effect from March 31. Trust-based pension schemes, which have different rules, must apply the cap from October 2017.
‘It is a bizarre situation when someone aged under 55 is exposed to limitless charges’