As it becomes clear that some pensioners are unable to fully benefit from the Government’s new pension freedoms, the Chancellor of the Exchequer has announced that a consultation on this issue will commence in July 2015.
Standing in at Prime Minister’s Questions for an absent David Cameron, Chancellor George Osborne told the House of Commons in mid-June 2015 that:
“People who have worked hard and saved hard all their lives should be trusted with their own money. But there are clearly concerns that some companies are not doing their part to make those freedoms available. We are investigating how to remove barriers and we are considering now a cap on charges.”
A key issue in the consultation will be the level of exit penalties which some providers impose when a customer wishes to transfer their fund to another provider. The Government has suggested that legislation to limit the size of these exit penalties could be introduced following the consultation. Older pension plans may have exit charges of as much as 20% of the fund value.
The consultation will also examine ways of making the switching process faster and easier.
Sometimes transferring the fund to another provider is the only way to benefit from the freedoms in full. Friends Life has already said that it is unable to offer the full range of freedoms, and that its customers are unable to make ad-hoc withdrawals from their fund, or take out flexi-access drawdown products. Unless Friends Life customers switch to another provider, their only options are to take out a conventional annuity, or to withdraw the entire sum in one go.
A few days before the Chancellor’s appearance in the Commons, the Secretary of State for Work and Pensions, Iain Duncan-Smith, made some choice remarks on the subject in a piece for the Daily Telegraph. Mr Duncan-Smith reminded providers that: “It is their money that you hold, not yours,” and referred to firms “dragging their feet.”
An exchange of letters between Harriett Baldwin, the economic secretary to the Treasury, and Martin Wheatley, chief executive of the regulator the Financial Conduct Authority, has also been published.
Ms Baldwin called on the FCA to ensure that barriers were not placed in the way of customers wishing to transfer their pension savings, and questioned whether failing to make the process simple could lead to a breach of the Treating Customers Fairly principle.
In his reply, Mr Wheatley promised that his organisation would examine how frequently exit charges were being levied, and at what level; and also said that the issue of creating barriers to switching would be looked at.
Although the previous Government trumpeted its pension freedoms as being available to all, the Government actually has no powers to compel Friends Life or any other provider to offer the full range of options to its customers.
The stance being taken by some providers also has implications for financial advisers, who may now need to consider whether to advise their clients to switch their pension fund to another provider if the existing provider is not offering the full range of pension freedoms.
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