How safe is your pension fund from exit charges

When Chancellor George Osborne announced the revolutionary pension freedoms in the March Budget, millions of retirees breathed a sigh of relief - from April 2015, the money they had saved over decades would be theirs to do as they wished (subject to tax after the 25% tax-free allowance), without the need to purchase an annuity if they didn't want to.

These freedoms are still set to occur, but it has since been realised that some pension schemes will charge exit fees of up to 20%, which we warned could lead to litigation against providers. Although this will affect only a minority of customers, that number is likely to be significant. The fee is also significant - only 5% smaller than the entire tax-free cash allowance of 25% of a fund's size.

The reason for these charges is that certain schemes predate pension flexibility. This is not new - some pension schemes do not allow drawdown, and clients must transfer into a modern one to access their tax-free cash. The government is not going to force providers to update their schemes, but it will rule that providers need to allow a transfer if the client wishes to. This means the providers will be able to charge large fees, which can have a huge effect on the overall fund a person has - to the point that it may not be worth them transferring out. It would mean they couldn't use the new freedoms.

From the public's point of view, this allows providers to retain outdated systems that do not offer a full range of modern services, and charge exorbitant fees to leave. Worse, big name providers Standard Life, Prudential, Phoenix and Legal and General have admitted they have such schemes and will charge exit penalties so a lot of people could find themselves stuck in these schemes.

Following the Budget, we saw an immediate change in people's attitude to advice, with many more clients requesting advice rather than immediately opting for an annuity. A lot of people became aware that a range of retirement options existed, and were keen to learn more about them. Yet sacrificing 20% of a fund to obtain these freedoms is a big ask - if you have £50,000 saved, you could lose £10,000 in fees. You'd also be paying your marginal rate of tax if you take more than your 25% tax-free allowance, which means people who had planned on removing their whole fund to invest elsewhere will be working with a far smaller pot than originally anticipated.

So what can you do? Unfortunately, as things currently stand the providers are committed to charging the fees where they apply. The good news is that most people won't be affected as they are in schemes that provide this flexibility without needing to move, but it's still a significant number of people who will be stung by the fees. If you're unsure if you are one of them the best thing to do is contact your provider and ask what your situation is.

Will these exit charges affect you? Have your retirement plans changed because of them? Let us know on Twitter or Facebook.

Call 0800 304 7288 for a friendly chat about your pension

The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section:

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