Government asks for help on early exit charges, pension transfers and financial advice
After much public angst in early June by Conservative politicians from the Prime Minister downwards in relation to the availability of the new DC freedoms (see Pensions Bulletin 2015/25), the subsequently promised consultation paper has been issued. However, HM Treasury’s “Pension transfers and early exit charges”, which covers early exit charges, pension transfers and related financial advice, has little to say.
Early exit charges
On early exit charges the paper acknowledges that there is no single working definition, either in legislation, or in use by the regulators, to cover the various fees and charges that are commonly perceived as exit penalties. It also accepts that any option which could cut across existing contractual rights, such as a statutory cap on exit fees, would be a significant step and so should only be taken as a “proportionate means of achieving a legitimate objective in accordance with the public interest”.
In relation to investment deductions, such as market value adjustments and terminal bonuses, the Government is minded not to regard them as exit penalties, but says that there may be a need for providers to improve their communication of these deductions to their members.
This section of the paper concludes with three options that the Government might take forward for further work if it concludes that there is clear evidence of excessive early exit fees and charges and a “sound rationale for policy action”. These are:
- A cap on all excessive early exit fees for those aged 55 and over – either as a fixed percentage of the value of the funds being transferred or at a capped monetary amount
- A flexible cap in certain circumstances – such as being applicable only to pots above a certain size, or to particular components of an exit charge; and
- A voluntary approach to restricting exit fees and charges
The Government is also interested in suggestions for alternative approaches.
Pension transfers
This section contains no new ideas of merit and one which is positively dangerous given the prevalence of pension scams – that, following the practice adopted by utilities when switching provider, the receiving pension scheme should lead the transfer process.
The main enquiry is around whether there should be a separate process for transfers out where benefits are flexible, without recognising that to a large degree there is one in place already.
Financial advice
Finally, the paper reflects a few of the issues that have arisen as a result of the requirement for the member to seek independent financial advice when making certain transfers, which was put in place by the Government in April 2015. But it does not contain any proposals.
Consultation closes on 21 October 2015 and the Government is then to look at the responses in conjunction with the responses the Financial Conduct Authority and the Pensions Regulator have received to their separate evidence gathering exercises (see Pensions Bulletin 2015/29).
Comment
This is a very disappointing paper as it contains so few ideas. It is also somewhat odd that it has been issued by HM Treasury when it is covering policy ground within the remit of the Department for Work and Pensions – a sign of who now is in the pension policy driving seat?
However, this consultation can be used as a platform to feed back to Government the issues that have arisen as a result of its rushed implementation of the new DC flexibilities and the misapprehensions that have arisen in the public mind. Right now it would seem that the only thing that will come out of this paper is pressure on certain providers to revisit early exit fees and charges applicable to some legacy products.
DWP closes down its Combined Pension Statement service
The Department for Work and Pensions is to close its combined pension statement service at the end of the current tax year. The service, available since 2001, enabled employers to provide their employees/scheme members with personalised State Pension estimates alongside private pension information.
The DWP now intends to provide a largely digital service instead where individuals will be able to access information about their national insurance and State Pension in one place. The service, which is being developed with HMRC, is intended to be launched later this year.
Comment
Nearly 15 years on, bringing all an individual’s pension entitlements together via one statement remains an idea whose time has yet to come. This news just marks the end of one chapter. Given the advance in IT technology since this service was launched, its closure was inevitable. But hopefully, private sector schemes will be encouraged to provide links to the new service when issuing their own benefit statements so that the combined pension statement concept is not entirely lost.
Ombudsman makes SIPP administrator pay for its mistakes
In what seems a hard-hitting determination, the Pensions Ombudsman has ordered the administrator of a flexible income drawdown plan to make good on the effect of its mistakes when it failed to spot that a proposed payment was not authorised under the pension tax rules.
The payment was the maximum that could be taken in a pension year. It followed another such payment just a month earlier (in the previous tax year, but crucially in the same pension year).
The administrator had responded to a request from the member’s financial adviser to make the second payment “as early into the next tax year as possible…”, but did not check that the payment was within the pension tax rules, or seek clarification from the adviser before paying it. There were also some other failings.
Although the Ombudsman only required the administrator to pay the member £300 for distress and inconvenience, what is significant is that he also ordered that the administrator recompense the member for consultancy and other fees that had been incurred as a result of this mistake, and to pay any additional tax liability that the member might have incurred.
Comment
From the Ombudsman’s viewpoint, this is a clear example of maladministration. Although the Plan’s terms and conditions specifically provided that the administrator could rely on written instructions from the member or his financial adviser without further enquiry, the fact that the payments were so close together led the Ombudsman to determine that the administrator should have advised the financial adviser of the penal tax implications.
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.
