A cap on early exit charges will apply to "flexible benefits" from 2017 if current proposals go through. It will be 1% in existing schemes and 0% in new ones.
Cap on early exit charges
On current proposals, a cap on early exit charges will apply in occupational and personal pension schemes (OPSs and PPSs) from 2017 (probably March). It will apply to "flexible benefits" (broadly, DC and cash balance benefits) in existing and new schemes.
Government and TPR research has found high charges are among a number of barriers to flexible access for members.
Among the proposals:
- As far as possible, the cap will work in the same way in PPSs and OPSs.
- Early exit charges will be capped at 1% in existing schemes, and banned new ones.
- The cap only applies to members eligible to take flexi-access (eg aged 55 or over).
- Trustees and service providers will be jointly responsible for compliance depending on who levies the charge.
The DWP is marshalling the exercise on OPSs and the FCA on PPSs.
The proposed definition of an "early exit charge" is one imposed when a member aged 55 or more acts to take their benefits, to convert them into a different form or to transfer them to another scheme and the charge is only incurred if the member does this before their expected retirement date.
In OPSs, the cap applies to any charges levied by the trustees or by any provider of services to them eg an external administrator or investment manager.
The plan is to exclude market value adjustments (MVAs) from the cap if they satisfy certain conditions eg reflect the difference between an indicative value given to a member and the eventual market value of her share of scheme assets on exit.
A terminal bonus to which a member is entitled will be unaffected by the charge cap.
In future, if there is evidence costs are being recharacterised to avoid the cap, the government will consider steps to counter this.
TPR will enforce the legislation in OPSs.
The government found inefficient transfer processes and uncertainty about when advice should be sought were also barriers to flexible access.
The latest (26 May) in a series of consultation papers has the most detailed proposals for a cap so far. The cap can only be introduced for OPSs once the Pensions Bill 2016 has been passed and regulations made. No draft legislation is available yet.