There will also be a 0% cap for new contracts, which will “stop the emergence of early exit charges in future”, the regulator revealed in its final rules on Tuesday.
The Department for Work and Pensions announced the same percentage caps on existing and new occupational pension schemes.
A consultation paper on capping early exit pension charges was published by the FCA on 26 May 2016 and closed on 18 August.
The FCA highlighted that exit charges that are currently set at less than 1% would not be allowed to increase.
Christopher Woolard, executive director of strategy and competition at the FCA, said: “People eligible for the government’s pension reforms should feel able to access them as they wish. The 1% cap on early exit charges for existing pensions, and the 0% cap for new contracts, will mean that current and future savers will not be deterred by these charges from accessing their pension pots.”
The 1% cap “strikes a proportionate balance between benefits, in terms of reducing the deterrent effect of early exit charges, and costs to firms of applying the cap”, the FCA said.
It further found that consultation responses on the 0% cap for new contracts showed that “exit charges are no longer a feature of the majority of recent personal and stakeholder pension schemes” and that the Retail Distribution Review had “removed any real justification for their inclusion in new contracts”.
Minister for pensions, Richard Harrington, said: “We are restoring fairness and creating a level playing field in a system that has favoured the interests of providers over consumers for too long.
“This new cap will protect people’s savings from excessive charges, so more of their money will go towards the comfortable retirement they have saved for.”
In early reaction, Tom Selby, senior analyst at AJ Bell, said: “The cap on early exit fees for pensions, including occupational schemes, is a start but 1% of a £100,000 ($125,232, €116,221) pension is still a £1,000 charge for accessing your own savings. The pension freedoms are now well established yet there are still thousands of people that are going to have to pay thousands of pounds to access them.
“We hope the authorities continue to monitor the cap to assess whether it should be lower or even abolished if early exit penalties continue to prevent people utilising the new flexible pension rules.
“The 1% cap on early exit penalties for pensions also makes the 5% Government sanctioned early exit penalty for the Lifetime ISA look preposterously inconsistent. Now the policy for pensions is confirmed, we’d like to see the same principles applied to the Lifetime ISA and the Government remove the 5% early exit fee before it launches in April 2017.”
Nathan Long, senior pension analyst at Hargreaves Lansdown, said: “The capping of early exit penalties at 1% is a huge step in the right direction. The 147,000 people aged over 55 who were facing exit penalties in excess of 5% will be relieved that they are now able to transfer to a more modern pension now the shackles have been released.
“It remains important to be vigilant when transferring pensions, as 1% could still be a chunky sum to lose from your pension at the point of retirement. There are also hundreds of thousands of people with large exit penalties under the age of 55 for whom the exit penalty cap will not help with pre-retirement consolidation, so it pays to be aware especially with older style pension plans.”