One in 6 hit by fee of up to £5,000 to cash in pension

ONE in six over-55s will be hit with exit charges of up to £5,000 if they want to profit from new pension freedoms, official data reveals.

Almost 700,000 people will have to pay to access their savings.

Of these, over 100,000 will pay more than £1,000 and 13,000 could pay as much as £5,000. Many will be charged even if they remain with the same pension firm but switch to a more flexible product.

Since April, over-55s have been allowed to spend their pensions as and when they wish rather than being forced to buy an annuity – a regular monthly income.

It follows a pledge by George Osborne in last year’s budget that pensioners would be able to use their savings like a bank account. But it has since emerged that many of those wanting to do so face stiff penalties.

The official data – from the Financial Conduct Authority – has revealed that about 670,000 over55s will face charges before they can take their money as a lump sum, or in several chunks.

Of these, about 147,000 will face charges greater than 5 per cent – threatening to erode their hardearned savings.

The authority published the data after demanding that major pension firms hand over details of their exit fees. It found that, while 84 per cent of people would not be billed to use their pension flexibly, the remaining 16 per cent would. This equates to around 670,000 out of around 4.1million over-55s who are eligible for the new freedoms.

The exit fees do not include annual management charges which savers will also pay if they withdraw some cash but leave the rest invested.

The figures were released after the Mail launched a Play Fair on Pensions campaign, which helped to spark a Treasury review into the high fees.

Tom McPhail, of financial firm Hargreaves Lansdown, said: ‘This is the kind of evidence that is likely to prompt the Treasury to act on this issue. It is interesting to note that it does not affect 84 per cent of people – so for the majority of the population it is not a problem.

‘But that still leaves thousands of people for whom it is a problem.’

Alan Higham, of Pensionschamp. com, said many consumers would be completely unaware that they had to pay exit charges.

He said: ‘These policies were nearly all sold in the days before transparent disclosure of charges was mandatory.

‘No doubt some charges are reasonable and fair, yet it is equally certain that many are facing unduly punitive charges that they never were able to appreciate.’

The FCA figures show that 204,500 pension policies have been accessed in the first three months of the pension reforms.

Savers can cash in their pots by either taking periodic lump sums, or by setting up a regular cash withdrawal while keeping the rest invested – income drawdown.

However, many cannot enjoy these freedoms because their pension provider does not allow such flexibility and they are then billed large fees to move to one that does.

A spokesman for the Association of British Insurers said fees applied to older policies, rather than to ones taken out today.

She added: ‘No pensions currently sold by ABI members have early exit fees and nearly nine out of ten customers saving with our members who are eligible for the pension freedoms will not face an early exit fee.

‘For those that do face exit fees, most only pay 2 per cent or less. Where one is charged it is not a penalty for leaving a scheme early, but usually to cover the potentially high costs of setting up the pension, particularly commission.’

Owen Smith, Labour’s work and pensions spokesman, said: ‘ It’s typical of the Tories to give with one hand and take away with the other. Labour has called time and again for a cap on fees and charges to make sure savers who want to access their pensions aren’t at risk from rip-offs and scams.

‘The Government should wake up to this problem and start standing up for consumers. It’s about time they acted to ensure people don’t lose thousands of pounds in charges when they take advantage of these new flexibilities.’