Millions of workers will be shut out of new pensions freedoms that let them cash in their nest eggs because firms plan to hit them with huge fees for taking their money.
From next April, savers will be allowed to cash in their pension pots and spend the money however they like, instead of being forced to buy a poor-value annuity, which pays an income for life.
But many face being hit with huge exit charges from their insurer - in the most extreme cases seen by Money Mail, this could wipe out as much as 20 per cent of their pension pot.
Plans derailed? Under new rules savers will be allowed to cash in their pensions pots, but many face exit charges from their insurer
Most savers will not even be aware the charges exist as they are buried in the small print. Many will be shocked to discover them for the first time when they try to access their cash - and it may be too late then to change their retirement plans.
Pensions campaigner Ros Altmann says: ‘The pension industry has completely failed to put customers at the heart of things and instead panders to its shareholders. It is acting purely in the interest of the pension company — not in the interest of the consumer.’
The exit penalties apply to millions of pensions sold during the Eighties and Nineties. These are largely work pensions as well as individual personal pensions sold to the self-employed by financial advisers paid hefty commissions by insurers for flogging their policies.
They are the same style of retirement scheme on offer to millions of workers today only with much higher charges.
The insurers who sold them clawed back the commission paid out to an adviser from the customer in hefty management charges spread across the life of the policy - typically 40 years or more. These juicy fees, which can run into thousands of pounds for each policy, have been a constant flow of profits for insurers over the years.
To protect their bottom line, they also packed these policies with huge exit fees to dissuade customers who tried to move their money at any point to a rival insurer for a better deal.
Pension reform: Regardless of what George Osborne wants insurers to do, some will clobber your pension fund with fees if you try to take your money before the retirement age stated in your policy documents
But Chancellor George Osborne’s plans to allow any people over the age of 55 with a workplace pension to get easy access to their pension cash poses a new problem.
Alan Higham, retirement director at Fidelity Worldwide Investment, says: ‘There are going to be masses of people locked out of their pensions by these charges.
‘Pension companies need to be upfront about what people can and cannot do, otherwise there will be a lot of anger.’
Regardless of what the Chancellor wants insurers to do, some will clobber your pension fund with fees if you try to take your money before the retirement age stated in your policy documents. These are 60 or 65 or possibly even 70.
The size of the exit fee will vary, but they can range from as little as 2 per cent to 3 per cent to as high as 20 per cent. Insurers say they cannot give individual examples of the penalties savers face. They claim they are too complex and are often tailored to individual policies.
But calculations worked out for Money Mail by industry insiders have helped to shed some light on this murky area. Typically, the further people are away from their retirement date, the more they will be stung if they try to get out.
Even savers only a couple of years away from their target retirement date as stated in their policy could face hefty charges if they try to cash in their pensions under the new rules. This is because the size of the exit fee also depends on the length of time someone has paid into a policy.
It means workers who only pay into a pension for a couple of years and then move jobs face being badly penalised when they try to cash it in years after.
A saver who paid into a workplace policy with a retirement age of 65 for two years in the early Nineties worth £20,000 could face charges of £3,600 - or 18 per cent - if they tried to cash in their pension when aged 60.
WHAT THE INSURERS HAVE TO SAY
- Legal and General says around 30,000 policyholders with pensions taken out before 2001 will face charges for cashing in their pots early.
- Friends Life says it still charges customers who try to cash in their pensions early. It is reviewing its policy.
- Aegon says early exit fees will apply.
- Phoenix Life says most unit-linked policies do not have a fee if they are cashed in early. But some do. It says it is reviewing its policy,
- Aviva says one in ten of its back book of pensions have early exit charges.
- Equitable Life says it may make a charge on group pension schemes worth more than £2 million which are cashed in in bulk.
- Zurich Insurance applies early exit charges to some policies set up before 2000 where initial fees are spread across the life of the policy.
- Skandia says some of its older pensions — those sold before 1999 — do carry exit fees for those who cash them in early.
- Prudential says there are no charges for cashing in your pension early, but those who have with-profits plans may face a deduction.
Stephen Jensen, a retired customers services manager from Saltash in Cornwall, faces losing 11 per cent of his £13,000 pot with insurer Abbey Life if he moves it - even though he is only four years off the retirement age in his policy.
From next year, the 61-year-old is eligible to take his pot under the new pension rules. He is desperate to leave Abbey Life because management charges of 5.25 per cent are being deducted from the bulk of his fund every year.
He signed up to the pension in 1987 when he started a new job, but remained with the firm for only two years. The value of his fund today is £13,337. However, if today he were to cash it in he would receive £11,973.
An Abbey Life spokesman says: ‘We are reviewing what further changes we need to make to our policies and the options that will be available from April 2015.’
And a spokesman for the Association Of British Insurers adds: ‘Someone saving through their working lifetime in the way the pension provider envisaged will find they are not penalised with early retirement charges.’
Do you face big fees to cash in your pension? Get in touch: r.lythe@dailymail.co.uk
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