Allowing early access could give pensions back their appeal.
Let them have it
In the late 1980s, pensions were the thing to have. The Government of the day advertised them with slogans that read “Break the chains” and the likes of the Pru bigged up the idea of retirement at 50. Some people missold pensions but there was really no need as the public flocked to join the pension club.
There were some hard luck stories. The 25-year-old woman who had just had a baby and needed access to the £500 she had diligently saved in her pension but had never been told she would have to wait until she was 50 to get it. But business folk knew their companies could pour money into executive pension plans and get loanbacks to bolster their cashflow, so they were not caught out by that rule.
Things have changed since then. The Securities and Investment Board came along with its pension review and then there was Gordon’s tax grab. SIB assumed everyone was guilty until proven innocent and the eloquent RU Owed? campaign certainly highlighted the profits to be made from claiming you had been missold a pension.
Labour introduced pension simplification and concepts such as prohibited investments, which are not prohibited, and alternatively secured pensions, which are not secured at all. Then there were restrictions on higher-rate tax relief and complex anti-forestalling legislation.
Is it any wonder the public lost its appetite for pensions?
The new Government needs to address this, and fast. Pensions need to be made attractive again and one way to do this would be to allow early access. Of course, pensions are for retirement but this does not mean they must be locked away until retirement. The success of pension liberation companies and rogue financial advisers in selling early access shows this is what the public wants.
Different legislation around the world allows early access to pension funds in a number of ways and in different circumstances. Plans can be used in the US to pay medical bills, to buy houses and on grounds of hardship. In most cases, funds are taxed at 10 per cent and subject to income tax. It is also possible to take a loan against a 401(k) plan.
Those drafting the rules must look at when early access should be allowed and how it should be taxed. The rules must be simple and this means the tax treatment must be simple, too. The Government must not get hooked up on avoiding every possible abuse, although clearly the rules cannot permit a free-for-all.
One approach would be to have payments before age 55 as fully taxable under PAYE, with no tax-free cash element. For those not paying tax because they are unemployed, this could mean the fund can be returned free of tax, particularly if it is small. There should be no limit on the number of times someone can access their fund, although product providers might decide to impose one.
This approach might make people want to start pension plans and, if it does, it will be one small step towards closing the savings gap.
David Trenner is technical director at Intelligent Pensions