Up to half a million pension savers could suffer high costs if they want to access their pension fund.
Hundreds of thousands of over-55s will be looking to cash in some or all of their pension pot following the new pension freedom reforms which came into effect on 6th April.
Now anyone with a defined contribution pension fund can access their pot to withdraw the entire lot or use as a bank to take as little or as much as they want when they want. Previously a saver would have had to take out an annuity or a drawdown policy.
However, many pension funds have clauses attached to them meaning that if a person wishes to cash in some or part of their pension before their stated ‘retirement date’, they will have to pay a heavy penalty.
Retirement ages were usually agreed on between the saver and the provider when the pension fund was started and are usually at 60 or 65 years, but could be as high as 70 or 75.
According to the Telegraph, many of the major pension providers have refused to tell how many pension funds are affected by early encashment penalties. Aviva, Aegon, Canada Life and Legal and General have all refused to give out details.
Zurich has said that around 20% of its pension funds have early encashment penalties or around 50,000 and that the average penalty was around 5% of the pot. Standard Life said 156,000 of its policies would be affected, but the average penalty was less than 1%. Old Mutual has around 6,900 affected policies and its average charge is 7%.
Not only is it worth checking the small print of your pension policy to ensure there are no early encashment penalties, many savers may find that they have guaranteed annuities rates attached to their pensions which offer annuities at a much higher rate than currently available and could potentially lose thousands of pounds by cashing in their pension instead of taking out an annuity.