The Financial Conduct Authority (FCA) has announced its final rules on capping early exit charges for consumers eligible to access the government's pension reforms from the age of 55.
In Policy Statement PS16/24: Capping early exit pension charges, the regulator stated that, from 31 March 2017, early exit charges would be capped at 1% of the value of existing contract-based personal pensions, including workplace personal pensions.
It added that early exit charges currently set at less than 1% may not be increased and firms will not be able to apply an early exit charge to personal pension contracts entered into after these rules take effect.
FCA executive director of strategy and competition Christopher Woolard said: "People eligible for the government's pension reforms should feel able to access them as they wish. The 1% cap on early exit charges for existing pensions, and the 0% cap for new contracts, will mean current and future savers will not be deterred by these charges from accessing their pension pots."
According to the Policy Statement: "Our rules are likely to be of most interest to those consumers with personal or stakeholder pensions who, after our rules come into effect, face early exit charges when they wish to access their pensions savings at or after normal minimum pension age (but before their expected retirement date).
"The statutory duty, and hence our rules, do not make any provision for consumers who have already taken, converted or transferred benefits from a scheme."
On 26 May, the FCA set out its proposals and draft Handbook rules for the application and level of a cap it argued was appropriate to discharge its statutory duty in Consultation Paper (CP) 16/15. The consultation closed on 18 August.
The regulator said the majority of the 36 responses it received concerned one or more of the following issues: factors included in, or alleged to be absent from, its methodology and cost-benefit analysis; its calculation of the costs for industry; and operational issues concerning the implementation of the cap.
Today's Policy Statement went on to explain why the FCA had decided its original analysis was suitable and it still remained of the view "a cap of 1% of the member's benefits in relation to existing contracts delivers the appropriate protection" required by its statutory duty.
It added: "It strikes a proportionate balance between benefits, in terms of reducing the deterrent effect of early exit charges, and costs to firms of applying the cap."
The document also argued a cap of 0% for new contracts would "prevent the emergence of early exit charges in future, with little financial impact for most firms", adding: "The consultation responses support our findings that a) exit charges are no longer a feature of the majority of recent personal and stakeholder pension schemes; and b) the implementation of the Retail Distribution Review in effect removed any real justification for their inclusion in new contracts."
The FCA said firms affected by the changes would need to ensure compliance with the charge cap from 31 March 2017 onwards.
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