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FCA and DWP to introduce cap on early exit penalties

Date: 30 November 2016 In May 2016 both the Financial Conduct Authority (FCA) and the Department for Work and Pensions (DWP) commenced separate consultations about the level at which early exit penalties should be capped in relation to personal and workplace pensions.

This was in response to the excessive early exit penalties being applied to individuals’ pension pots, by certain pension providers, if someone wanted to access or move their money following the introduction of the Pension Freedom legislation in April 2015.

Pension Freedoms
Exit penalties were a common feature included in pension policies from the 1970s and 1980s.

The rules of some of these pension policies state that savers must pay a penalty as a percentage of their total pension pot if they wish to have their savings paid or transferred earlier than the policy specifies (usually from age 65 or 70). Currently savers can face average early exit penalties of around 5% of their pension pot for taking their pension earlier than the contractual pension age.

Following the consultations the FCA has now announced that as from 31 March 2017 early exit penalties will be capped at 1% of any existing “contract based” personal pension pots.

Personal pension policies entered into after 31 March 2017 will have no early exit penalties.

The DWP will introduce the same capping levels as those in personal pensions for workplace pension schemes, which are regulated by the Pension Regulator, from October 2017.


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