City watchdog caps pension exit penalties

THE Government has defended a 5 per cent exit penalty that will apply to its Lifetime Isa scheme, just as the City watchdog implements a ban on similar penalties for other long-term savings arrangements.

The Financial Conduct Authority confirmed yesterday that pension companies can charge no more than 1 per cent to savers wishing to access their pension cash over the age of 55. From April 2017 new pension schemes will not be able to apply any exit penalties whatsoever.

The Department of Work and Pensions made clear that no such cap would apply to the proposed Lifetime Isa, also due to become available from April. This will impose a 5 per cent penalty on savers who withdraw their money before the age of 60, other than to buy a first home.

The cap on pension withdrawal charges – which fol-

lows campaigning by The Daily Telegraph – is viewed as necessary by the FCA if savers are to enjoy the pension freedoms introduced in April last year.

In a report coinciding with the FCA’s announcement, the Department for Work and Pensions said exit fees on pensions were “fundamentally different” to the exit charge on Lifetime Isas.

It said: “Where people have early exit charges on existing products, they will have signed up to these before the pension freedoms came in to force and so could not have made an informed decision in light of the pension freedoms. The Lifetime Isa is a different product and it is clear from the outset when the charge will apply.”

Tom Selby, of AJ Bell, the fund shop, said the Lifetime Isa fee was “unfair” and ran counter to the pension freedoms. But Jon Greer, of Old Mutual Wealth, said it was “an incentive to use the product for what it was intended for – house purchase and from the age of 60”.

After the cap was announced, Tom McPhail, a pensions expert, said the ban on exit penalties “doesn’t go far enough. A 1 per cent ceiling still leaves room for investors to suffer a hefty hit”.