Towards the end of 2010, the Government opened its consultation into access to pension savings earlier than 55 to add flexibility to draw from accumulated funds where circumstances warrant it, particularly in times of financial hardship. It presents a number of challenging issues for the UK, notably:
Do individuals withdraw capital or borrow from their funds?
- What conditions should there be for replacing the funds, if any?
- How might this affect investment and funding strategies?
- Are there implications for falling back on the state?
- Is there potential for abuse of tax relief?
Even though the pension regime was radically “simplified” in 2006, complexity is arguably creeping back into it, something that the Government recognises.
The Government has maintained a commitment to improving flexibility over savings, to encourage individuals to start saving or to save more.
But the Government rejected early access, although it said “at the present time”, so it could conceivably reappear on the agenda.
The Treasury concluded:
- There is limited evidence that allowing early access would have a positive effect on overall pension contribution levels or provide significant help to individuals facing financial hardship.
- The extensive private pension reforms already planned, most notably automatic enrolment, should be implemented before the Government considers further reform.
One point out of the consultation is the possibility of expanding existing savings models to provide “feeder funds” for future pension investment. This might involve a taxadvantaged savings vehicle, akin to a cash Isa, that, once built up to a certain level, could either, on request or automatically, be rolled over into a pension contribution.
While in the non-pension environment, the capital would be accessible and could be called upon for other purposes, once rolled over, it would be subject to pension legislation. This would require some care to be taken on pension input and allowable contribution limits but would give extra flexibility in planning, particularly for those on lower incomes who would like to save but may initially find it difficult to commit additional funds.
The introduction of the national employment savings trust and automatic enrolment will raise the profile of pension planning but it remains to be seen how the Government’s target market responds.
Individuals will have the ability to opt out and, if the numbers of opt-outs are high, the Government will want to understand what the drivers might be. If accessibility is an issue, then we might expect the debate to be reopened.
Stephen Greenstreet is managing director of Origen Financial Services