Under the pension flexibilities introduced in April 2015, members of defined contribution (DC) pension schemes are able to use their benefits in more ways (including taking them as 100% cash) than used to be the case, provided this is allowed by the scheme rules.
The government, keen to remove a possible disincentive to those seeking to access their pension savings, has now finalised regulations restricting the early exit charges that can be applied to the funds of members of schemes wishing to take advantage of the DC flexibilities. From 1 October 2017:
- Exit charges for pre-1 October 2017 members will be limited to 1% of the benefits being taken, converted or transferred, or the amount provided for under the scheme rules as at 1 October 2017 if lower. Trustees cannot increase charges and new early exit charges cannot be imposed.
- Early exit charges for new joiners are banned once the regulations are in force on 1 October 2017.
Similar provisions already apply to contract-based schemes under amendments to FCA rules that came into effect on 31 March 2017.
Guidance issued by the DWP confirms:
- Market value adjustments (MVAs) do not fall within the definition of "early exit charge" so trustees and service providers are still able to apply them. Any MVA should be applied before calculating the value of a member’s pot to assess whether any charge would come within the 1% cap.
- As terminal bonuses are not charges they do not form part of the cap assessment. However, where a member has a "reasonable expectation" that they will receive a terminal bonus, it should form part of the value of a member’s pot, and should be added before the assessment is carried out.
- Any other exit charges derived from occupational pension scheme investments in "with profit funds" will still fall within the cap.
Comment & Actions
- The same regulations will also prohibit the imposition on members of occupational pension schemes used for auto-enrolment of charges to recover the cost of commission payments made to advisers. This will apply in relation to contracts entered into before 6 April 2016 – member-borne commission has already been banned for arrangements entered into (or renewed or varied) on or after that date. To give service providers time to update their systems, the prohibition will not apply until 1 April 2018. Service providers will be required to confirm in writing to trustees or managers, within one month of 1 April 2018, that they are complying with the prohibition.