Early Encashment Penalties Stifle Pension Freedom

A new survey conducted amongst financial advisors has found that around 50 per cent have had difficulties opening up pensions for their clients because of early encashment penalties. These penalties limit the amount of freedom that pension holders have, even with the changes in pensions rules introduced last year.

Early Encashment Penalties Stifle Pension Freedom

Impact of Pension Changes

From April 2015, pension reforms have given consumers greater access to the money in their pension pots. This includes the ability to withdraw lump sums at any point after they reach 55 years of age.

Statistics covering the initial stages of the changes show that £2.5 billion was paid out in income drawdown and cash over the first three months. However, this only amounts to under 1 per cent of the total pension funds that the over-55s hold.

Difficulties of Exit Fees

One of the areas preventing many pension holders from accessing lump sums is the concern over early encashment penalties. A survey conducted by online investment platform AJ Bell showed that 45 per cent of financial advisors have clients who have been hit by exit penalties. Fourteen per cent of those questioned said that 10 to 15 per cent of the clients they dealt with had been unable to access their funds due to the penalties.

Many within the industry feel that these penalties are going against the principles behind the changes, which were greater choice and flexibility. When businesses are using software for financial advisors such as that provided by http://www.intelliflo.com/, they have to take these exit fees into account. There are often vastly inflated fees for administration costs that do not correspond to the level of work required.

There can also be significant differences in the level of penalties that pension holders face. Those working in the industry believe that a fair exit fee should simply reflect the administrative cost rather than being a way for providers to increase their profits. In many instances, this should be no more than £30.

With the growth in demand for greater choice over pensions, many policy providers will have to examine their early encashment penalties. They will face increasing pressure to limit these or even remove them altogether to enable more pension holders to access the money that they are entitled to. However, there might be a need for Government intervention if providers do not make changes themselves.