Russell Jones: Condemned ‘scandalous’ fee for moving an old pension pot
A horrified saver has discovered he faces a 78 per cent exit penalty to move an old Friends Life pension pot – exposing the large loophole in the Government’s drive to stamp out excessive fees.
Russell Jones, 36, was forced to abandon plans to merge a £615 pot with his other retirement funds after hearing Friends Life would wipe out most of its value by charging him an early surrender penalty of £477.
In April, the Government banned exit fees on all new pensions and capped them at 1 per cent for over-55s, following an outcry from older people wanting to use new pension freedoms to access their funds.
But the cap doesn’t apply to older pots held by younger savers, although they often want to move and combine dormant funds to make them easier to manage or reduce fees.
Mr Jones, now a project manager in the broadcasting industry, built up his pension pot while working at a measuring and testing products firm, A&D Instruments in Oxfordshire, for 10 months in 2002 and 2003.
Mr Jones told This is Money he was ‘horrified’ when Friends Life told him the size of the exit penalty for moving his pension.
He added: ‘Apart from this scandalous fee, I should also mention that Friends Life made viewing this pension online impossible.
‘I have another Friends Life pension from when I worked with the BBC which is much bigger and much more recent. I have no problems viewing that one, but my A&D pension below it, the one in question here, is unviewable.’
Pensions firm Aviva, which owns Friends Life, said it was unable to comment on the 78 per cent exit penalty on Mr Jones’s pot because it didn’t have permission from his former employer’s pension scheme trustees.
But it said some older-style pensions were structured so that early premiums were used to pay set-up, administration and advice costs of funds designed to run 30-40 years until someone’s retirement age. Aviva’s full statement is below.
WHY ARE SOME PENSION EXIT FEES SO HIGH?
Exit fees were routinely written into the contracts of pensions sold in the 1970s and 1980s – and this case highlights how they were still being included in the terms and conditions of some schemes during the early 2000s.
They force savers to forfeit a percentage of their total pension pot if they access their savings before a set age, usually 65.
Many of the schemes affected are old-fashioned insurance company-based pension plans which have a maturity date, as opposed to modern work or personal pensions where contributions are invested in funds through a platform.
Insurers have argued the fees are fair because they would otherwise be unable to recoup commission paid to salesmen when the pensions were originally sold.
This money is usually clawed back through annual management fees over many decades, but if a holder cashes in early that means the firm can’t collect as much as it hoped.
When approached about the case, Mr Jones’s ex-employer A&D Instruments said: ‘We are unable to comment given the confidential nature of the matters you raise. We can, however, confirm that we would be more than happy to talk to the scheme member directly regarding any questions they may have.’
The 78 per cent penalty came to light when Mr Jones contacted online pensions specialist PensionBee about merging several old pension pots so he could manage them all in one place.
Jasper Martens, vice president of marketing at PensionBee, said: ‘This is one of the biggest exit fees we’ve seen to date. I could not believe it until we received Russell’s letter.
‘In a time where we simplify our finances, managing our money on our phones, a pension provider can impose huge exit fees if you want to move it to another provider of your choice. We call all pension providers to abandon the practice of locking customers in by charging exorbitant exit fees.’
PensionBee found that Mr Jones is being charged on ongoing management fee of 0.75 per cent on his Friends Life pot, which is in line with another cap set by the Government on fees charged to people saving into default work pension funds. However, while he was still saving into the pension, Friends Life charged Mr Jones 5 per cent of any contribution paid into his pot.
When the Government introduced a 1 per cent exit fee cap earlier this year, this was in the context of pension freedom reforms giving over-55s the right to access their savings, according to Hargreaves Lansdown head of policy Tom McPhail.
The fee cap therefore only applies to people above that age, because it was about getting them access to their pensions not about younger savers being able to move them around, he explained.
‘You could make the case that irrespective of whether people access pots to draw income, is it legitimate and reasonable for pension providers to put substantial barriers to exit in front of their customers? People should be able to move their pots around,’ said Mr McPhail.
He believes that the Government should have gone further and said exit fees should simply reflect administration costs, because 1 per cent on large pots can still be a substantial amount.
Regarding the 78 per cent exit fee in this case, he added: ‘It is hard to see how anyone could justify that kind of penalty. I stand by my point about administration costs.’
A Treasury spokesperson said: ‘We capped pensions exit fees for those aged over 55 because it’s right that they should be able to spend their hard-earned retirement savings how they want.
‘Under 55s are still in the process of saving into rather than spending their pensions, although they too will benefit from the 1 per cent fee cap later in life.
‘We would encourage all consumers to carefully consider the terms and conditions of their pension pots when deciding whether to consolidate.’
Most workers tend to build up a backlog of dormant pensions as they move on to new jobs, and a couple of years ago the Government looked into introducing an automatic ‘pot follows member’ system to help them keep track of savings, before eventually scrapping the plan.
WHAT DOES FRIENDS LIFE SAY?
‘We are not able to discuss the specific details of any pension scheme member’s case without the permission of the pension trustee,’ said a spokesperson for pension provider Aviva, which now owns Friends Life.
‘This is because the trustee is the policyholder while individuals are scheme members. We have sought permission to discuss this case but this has not been granted.
‘As a general comment, some older style pension policies are structured so that early premiums are used to pay for set-up and administration costs, often including the cost of advice, on a pension contract that is designed to run for a number of years, usually until the member’s normal retirement age.
‘This cost would normally level out over the 30-40 years that the member/employer is saving into the pension. If contributions are only made for a very short period of time, a greater proportion of these contributions is used to pay for the initial set-up costs of the contract than if contributions continued to be made over a longer period.
‘We make it clear in our policy documentation that, in order to gain maximum benefit from a pension, it should run its full term until the selected retirement age, and if the transfer value is taken during the very early years it is likely to be less than the amount paid in.’
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