Thinking about accessing your pension?

So you want to exercise your new pension freedoms, but do you know what the exit fee will be?

 
Currently those wishing to access their pension pots can be stung with exit fees reaching up to 20% of the value of their savings, though many lenders have capped fees to 5%. 
However The Financial Conduct Authority has now proposed introducing an exit charge cap which limits the fees to 1% of the value of a customer’s pot for existing pension and banning any exit fees on new contracts entered into after the new rules come into force. 
 
This only applies to people wanting to tap into their pensions, not those who want to continue saving but swap their pensions to another provider. 
 
New pension freedoms were announced last year, offering the over-55s greater access to and control over their retirement savings, allowing them to spend, invest or save their pension pots as they choose.  
 
The FCA will be given both the ability and duty to cap exit fees by parliament once the relevant section in the Bank of England and Financial Services Act 2016 comes into force.
 
“Together with the ban on exit fees in future contracts, we are proposing a 1% cap on exit charges in existing contracts to ensure people can access their pension pots without being deterred by charges. This is an important step so people feel able to access their pension savings should they wish to.” Said Christopher Woolard, director of strategy and competition at the FCA.
 
It’s not just exit fees which can cost retirees when they try and take advantage of the newly flexible rules. Only 25% of a pension can be taken tax-free. The remaining 75% will be taxed at their usual rate of income tax.
 
The over-55’s can still earn up to the tax-free personal allowance each year, but income from other sources such as the state pension and interest on savings also count as taxable income and will go towards that allowance. 
 
If they take out all their funds in one lump sum it will mean they will pay the higher rate of income tax on the rest. The more tax-efficient option is to take the money in smaller lump sums, of which the first 25% will be free and they will pay less tax as they spread the income over tax years.