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Scrap all early encashment penalties on UK pensions that don’t offer freedoms, says AJ Bell


In response to the Treasury consultation on pension transfers and early exit charges, AJ Bell has called for all early encashment penalties that block access to the new pension freedoms to be scrapped.

The ability to withdraw money from a pension without constraint has revolutionised pensions and reinvigorated customer engagement.  Anything that gets in the way of savers being able to benefit from that change should not be allowed.   

Where an individual who has reached age 55 is in a pension product that has not been updated to allow access to the pension freedoms, early encashment penalties should be banned.

The FCA review seeks to ensure that there are no barriers to people accessing the new pension freedoms, in particular excessive early exit penalties.

AJ Bell believes that pension exit costs should be relevant to the work carried out by the provider today, set at a reasonable level, clearly disclosed and not prevent people accessing the pension freedoms. Early encashment penalties on some old style life assurance products do not meet any of those requirements.

Limiting the ban on early encashment penalties to individuals who are over 55 and where access to the pension freedoms is being blocked will lessen the immediate impact on providers. 

Billy Mackay (pictured), marketing director at AJ Bell, says: “The main reason given for exit penalties is to cover initial costs but you have to question whether it is reasonable to still be collecting charges for events that may have happened around a quarter of a century ago. 

“It is debatable whether some exit penalties really do relate exclusively to initial set up costs or whether they are actually about on-going provider profitability. In reality the cost was baked into the contract many years ago to ensure the product was profitable over a range of customer circumstances. 

“This challenge has proven to be the elephant in the room for many years. Change will only happen if you can balance the needs of the customer with the financial consequence to the provider. Limiting the ban to penalties beyond the age of 55 where there is no access to the new pension rules therefore seems sensible.”

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