Freedom and choice in pensions allows, from April 2015, a pension plan owner to take the whole of their pension plan fund as they wish.
25% of this will be tax free and the balance treated for tax purposes as if it were income.
But many hundreds of thousands of people may find the cost of taking their whole pension fund prohibitively expensive.
This is because they have “old style” pension plans that come with quite severe exit penalties.
Historically some pension plan product providers made an art form out of the charging structure that applied to consumers when they purchased pension plans.
Such plans might have bid/offer (buying and selling) spreads on the prices of their investment units, monthly policy charges and notoriously “capital units” which sounded good but actually had higher annual management charges.
They also might have exit penalties so that if you had the temerity to want to take your benefits before the selected retirement age or perhaps transfer away to a new plan provider, the face value of your plan would be reduced so that the plan provider re-coupes the charges they would have taken in the future.
You really needed to be either very good at maths or an Actuary to understand what you were paying for the benefit of owning such a plan.
In many cases such charges had a sever impact on the investment returns of the pension plan.
The consequence of holding such a plan is that if next year you wish to avail yourself of the full benefits of your plan (assuming you are aged 55 or over) you may well suffer a significant penalty, and therefore cost, by doing so.
Each plan, and plan provider, will have a different way of calculating the exit penalty but the cost can be very high indeed, certainly in many cases in excess of 20% of the plan value.
This is written into the pension plan contract.
It is not illegal. Nor based on the environment in place at the time that you purchased your plan is it immoral it will just look like that in the cold hard light of 2014/15.
To be fair many years ago some product providers, Standard Life are a good example, changed the charging basis of their old style pension plans so that their customers were no worse off than they would have been buying a pension plan under a charging basis known as “stakeholder charging” (no exit penalties allowed) so it is not all pension plans that are subject to these exit penalties.
What can you do about it? Take impartial, independent financial advice.
The exit penalties, as I described above, are effectively the future plan charges bought forward to today.
In other words you would still pay them even if you held onto the plan until selected retirement age. It is just that a 20% penalty now is very much more stark than if it were paid over the next ten or fifteen years.
Is the availability of your pension fund now (April 2015) more important to you than in say 10/15 years time? In other words is it worth accessing the money now to use it as you wish?
Others may launch a moral crusade against such charges and such providers may come under some pressure to reform and update their plans. I am not convinced all will do so.
Contractually plan holders have signed up (knowingly or otherwise) to these plan charges the important thing is that they take advice before embarking on a costly and irrevocable decision.
