What is an exit fee?

If you’re considering withdrawing your savings or transferring your pension from one provider to another, it’s important to be aware of any charges you may incur as a result.

An exit fee’s one type of pension charge that some providers impose on their customers before they can access their pension. Exit fees are typically a feature of older pensions set up before 31 March 2017. This is when the Financial Conduct Authority (FCA) introduced a cap on early pension exit charges to make it easier for savers to access their pension pots. Thankfully, as a result, exit fees are becoming increasingly less common though may still be found in some pensions.

The FCA’s amendments to its rules on the way pension exit charges work included three main changes.

  • Exit fees are capped at 1% of the value of a pension for those aged over 55 (57 from 2028).
  • Providers are banned from increasing the exit fees of policies where the exit fee is already less than 1%.
  • A complete ban on charging exit fees on pensions set up on or after 31 March 2017.

The potential impact of exit fees

Unfortunately, where you may have to pay an exit fee the charge could represent a large portion of your pension savings. An exit fee may be charged as either a percentage or a fixed amount of your pension pot’s value. Where an exit fee is set as a percentage, the bigger your pension pot the bigger the fee you’ll be charged.

The size of an exit fee can vary from provider to provider but some have charged customers as much as 10%. An exit fee this large is likely to have a significant impact on the value of your pension and whether you decide to withdraw or transfer it to a new provider, particularly if you have a smaller pension pot or if you’re close to retirement.

If you choose not to pay an exit fee and instead stay with your current pension provider, you may end up effectively paying the equivalent or more through higher ongoing fees, such as an annual management charge or perhaps as a result of overall poor fund performance.

Unfortunately, the potential financial impact of paying an exit fee may mean some customers are discouraged from transferring their pension, which could lead to them losing out on switching to an alternative scheme that’s better suited to their needs.

Whether or not you should pay an exit fee to transfer your pension to a new provider can be a hard decision to make. For those still a few years away from retirement, there’ll be more time to potentially make up for any losses incurred by paying an initial exit fee. However, even for those close to retirement, it may still be worth transferring to take advantage of income drawdown products.

Income drawdown allows you to make ad-hoc withdrawals while leaving the rest of your pension invested. This means the value of your pension pot could potentially increase over the longer term and may make up for the loss incurred through an exit fee. However, the decision on whether or not you should transfer your pension to a new provider depends in part on how competitive alternative pensions may be in their investment performance, as well as the rates of any ongoing fees such as service or platform fees.

If you’re invested in a with-profits fund, what’s known as a Market Value Reduction (MVR), may be applied if you withdraw your investment when the total value of the fund has fallen, typically as a result of poor market conditions. An MVR will reduce the value of the payout you receive, so you may get back less than you originally invested. However, an MVR will reflect the actual value of the fund after accounting for any falls in its value. In this sense you aren’t being penalised for exiting the fund but rather an MVR helps ensure that those who remain invested and those leaving all receive a fair share of the fund.

No exit fees with PensionBee

We won’t charge you any exit fees should you decide to transfer your pension away from PensionBee. Similarly, there are no charges for those looking to transfer their pensions to us no matter how many pensions you’d like to transfer. Instead, there’s just one simple annual fee. It’s worth noting that we apply a withdrawal fee of £150 in certain circumstances; when accessing your pension within the first 12 months of being with us or if the value of your account is less than £150 at the point of withdrawal.

For those looking to transfer their pension to PensionBee, we’ve developed a risk-based approach to checking for exit fees as well as any special benefits to ensure our customers are informed of these before deciding to transfer away from their old provider.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

Last edited: 06-04-2024

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