The Treasury’s consultation on early access to pension funds, which closed on February 25, has raised questions over how to promote long-term saving.
Recent DWP figures show there are seven million people who are not saving enough for their retirement.
The DWP has proposed allowing access to a portion of pension savings early to counteract the powerful disincentive to save that comes from locking away pension funds for many years until retirement.
Four different models of delivering early access for people under 55 have been proposed by the Government. They are:
- A loan model
- A permanent withdrawal option that will be limited to specific circumstances such as financial hardship
- Early access to the 25 per cent tax-free lump sum
- A flexible feeder fund model that links pension pots and Isas.
The basis for the UK early access proposal is the US 401(k) savings account, which has elements of early access built into it.
But both the Investment Management Association and the National Association of Pension Funds argue there is no evidence for early access encouraging saving and conclusive demonstrations of its success are needed before implementation in the UK.
IMA head of research Jonathan Lipkin says: “Providing an early access facility has some intuitive appeal but there is insufficient evidence that early access will result either in higher participation or contribution levels. At the same time, greater administrative complexity and costs will inevitably arise from such a step.”
However, the key bone of contention is that early access may reduce the funds that people end up with in retirement.
The IMA has highlighted the risk of siphoning money off pensions while the NAPF has expressed concern that early access will lead to reduced savings and more people relying on the state.
The Association of British Insurers has also been less than enthusiastic about the idea of early access.
Assistant director of retirement savings Yvonne Braun says efforts need to be made to encourage saving rather than offer opportunities for savings to be eroded before retirement
She says: “The main challenge we face in this country is that people are not saving enough. We need to build up consistent, long-term savings habits. Early access to pensions may seem attractive on the surface but close inspection shows it is not a silver bullet that will solve the nation’s undersaving because it raises significant risks that people end up with even less money in retirement. Before people can access their savings, they need to build them up in the first place to make sure they have a decent income in retirement.”
The ABI says the answer is not early access but concentrating on getting auto-enrolment working properly to maximise the number of people savings.
But the issue of auto-enrolment also lies behind some of the negativity on early access. The Pensions Management Institute has expressed concern that the Government’s proposals would increase administrative complexity in an area already under increasing bureaucratic pressure and discussing early access would undermine the role of auto-enrolment in encouraging pension saving.
There are also concerns about tax treatment of any remaining funds.
The one aspect of early access that the industry is united in supporting is a merged Isa and pension fund, which would meet investors’ short-term and long-term needs.
Fidelity’s suggestion of combining the £50,000 annual pension limit that comes into force in April with the £10,200 Isa annual allowance echoes proposals first made in a report by the Centre for Policy Studies in 2010 and would allow savers considerable flexibility over their long- term savings.
The IMA is also keen for further expansion of the Isa regime to help encourage saving by offering more flexibility.
Lipkin says “The focus should be on promoting simple and transparent savings vehicles that help individuals meet their short and long term investment needs. Further consideration of the relationship between Isas and pensions would be a positive step and could simplify the UK savings environment.”