Pension exit fees: when can providers charge them?
Exit fees — also called early exit charges or transfer penalties — can reduce the value transferred out of an old pension. The rules depend on when the policy was taken out and the member's age.
- ▸The FCA capped early exit charges at 1% for members accessing or transferring their pension. For members at or past their scheme's normal retirement age, the cap is 0%.
- ▸The cap applies to personal pensions and stakeholder pensions set up before April 2017. Policies set up after that date cannot have exit charges at all.
- ▸Some older policies — particularly those from the 1990s and 2000s — have exit penalties of 5–10% or more, applied through Market Value Reductions on with-profits funds.
- ▸An exit fee does not automatically make consolidation a bad idea — the long-term fee saving from a cheaper provider may still outweigh the one-off exit cost.
The FCA cap (1% for those within 12 months of normal retirement)
In April 2017, the FCA introduced a cap on early exit charges for members of contract-based pension schemes (personal pensions and stakeholder pensions).
The cap works as follows:
- Members aged 55 or over (or within one year of their scheme's normal minimum pension age): Exit charges are capped at 1% of the pot value.
- Members at or past their scheme's normal retirement age: Exit charges are capped at 0% — no charge can be levied.
- Policies set up from 1 April 2017 onwards: Cannot include exit charges at all.
This cap applies to contract-based schemes regulated by the FCA. Trust-based occupational pension schemes (regulated by The Pensions Regulator) are subject to separate but similar rules.
The cap was introduced because the pension freedoms (April 2015) gave members the right to access their pots flexibly, but many found that exit charges of 5–10% effectively blocked them from exercising those freedoms.
Historical exit penalties on older policies
Policies taken out in the 1980s, 1990s, and early 2000s often included exit penalties designed to recover upfront commission paid to financial advisers. These penalties were structured in various ways:
Paid-up penalties. If the policy was made "paid-up" (contributions stopped early), a penalty applied — often a percentage of the fund value, declining over time. A policy with a 25-year term might charge 10% in year 1, declining to 0% by year 25.
Market Value Reductions (MVRs). With-profits policies can apply an MVR when money is withdrawn or transferred outside a specific exit window (often the policy's anniversary date). MVRs reflect the difference between the guaranteed or smoothed value shown on statements and the actual market value of the underlying assets. They can be 5–15% or more in poor market conditions.
Early retirement factors. Some older policies offered better terms at the scheme's normal retirement age (e.g. 60 or 65) and applied reductions for earlier access.
These penalties are separate from the FCA's 2017 cap. The cap limits the explicit "exit charge" but does not necessarily cover MVRs, which are classified as investment adjustments rather than charges.
When exit fees make consolidation uneconomic
The decision framework is a comparison of two numbers:
- The one-off exit fee (as a percentage of the pot)
- The annual fee saving from moving to a cheaper provider, compounded over the expected holding period
Example: A £30,000 pot with a 5% exit fee (£1,500) is currently charged 1.2% per year. The proposed new provider charges 0.35% per year.
- Annual fee saving: 0.85% x £30,000 = £255/year
- Break-even: £1,500 / £255 = approximately 6 years
If the pot will be held for 20+ years, the £1,500 exit fee is recovered within 6 years and the remaining 14+ years are pure savings. If the member is within 5 years of retirement, the exit fee may not be recovered.
The pension consolidation calculator and pension fee calculator model this comparison for any pot size and fee combination.
How to find out if your plan has one
Exit fees are disclosed in the scheme documentation — specifically:
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The policy schedule or key features document. This was provided at the time the pension was set up and details the charging structure, including any exit penalties.
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Annual benefit statement. Some providers include exit fee information on the annual statement. If not, it can be requested.
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Direct enquiry. Contact the provider and ask: "What charges would apply if I transferred my pension to another provider?" Request the answer in writing with the exact amount or formula.
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Pension provider's online portal. Some providers now display exit charge information online alongside the current pot value.
If the provider cannot or will not disclose the exit fee, escalate to a formal complaint. FCA rules require providers to disclose all charges to members on request.
- ▸The FCA capped early exit charges at 1% for members of contract-based pension schemes who are aged 55 or over, effective from April 2017. The cap is 0% for members at or past their scheme's normal retirement age. [FCA]
- ▸Personal pension policies set up from 1 April 2017 onwards cannot include early exit charges. [FCA]
- ▸Market Value Reductions (MVRs) on with-profits funds are classified as investment adjustments, not exit charges, and are not subject to the FCA's 1% cap. [FCA]