Unlocking the pensions moneybox
Government considering unlocking the pensions moneybox – Allowing access to pension funds could help overcome the long-term savings crisis
by Dr. Ros Altmann
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The Treasury has just launched a consultation on allowing people to take money out of their pension funds early if they need to. This could be fantastic news.
At the moment, policy treats pensions as the only viable long-term savings vehicle. It’s pensions or nothing as far as getting an employer contribution is concerned, so if you are not willing to tie your money up until your mid- fifties, you may lose out on the benefits of long-term saving altogether. However, many people in their twenties and thirties, particularly if they have debts or if they cannot be sure they will never need the money in their pension fund before their fifties, find the idea of pensions too daunting, especially after so many scandals in recent years. They don’t want their money ‘confiscated’ for decades, never being allowed to touch it even if they need it.
Allowing people to take at least some money out could encourage more people to contribute in the first place. Pensions work well for top rate taxpayers (the top 12% of taxpayers), but basic rate tax relief is often just not enough of an incentive to justify the restrictions of pension saving. It is the employer contribution, rather than tax relief, that is the most valuable.
Why should workers be denied their employer’s contribution just because the pensions vehicle is not suitable for them? Long-term saving does not have to mean only pensions. The important thing is to get people to save. If it is not in a pension, that may not always matter, as long as they get used to saving.
Yes, there is a risk that some people will spend the money before retirement, but it is their money and, if they do really need it, should they not be allowed to have it back (minus any tax relief of course)?
A modern benefits package could put people into a workplace savings scheme, not necessarily just a pension, deducting some of their salary each month, topped up by extra from their employer. Younger people could even use this to pay back student debts, some may use it to buy a house and others will use it for pensions, but only if that suits them.
Of course, pensions are what the industry wants, because it is a captive pool of money to earn fees on for many years, and in theory it is best for people to ensure people cannot get money out and spend it before retirement. However, in practice, if that means people will not put money in at all, then we have made the best the enemy of the good.
By allowing more freedom and flexibility, we could harness the power of the employer contribution to generate more savings overall, and encourage more into the habit of saving, without putting them off before they start. Pensions are really old-fashioned. The more we can allow people freedom to choose what savings vehicle suits them best, the better.
Employer saving schemes could allow workers to choose whether they want pensions or ISAs – both vehicles have their merits, especially for basic rate taxpayers. Why not introduce a fixed term ISA, say 5 years, so that people can get used to managing without that money, but could get it back if they really need it? By forcing people to choose between pensions or nothing, many workers end up with nothing. They do not save at all, when they could benefit greatly from employer contributions others will get.
If we are serious about restoring a savings culture, allowing more flexibility in pensions is a must.