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Access points

Should the Government allow early access to pension funds to encourage greater take-up?


Stuart Southall
Chairman, the Association of Consulting

The Association of Consulting Actuaries is in favour of introducing early access to tax-free cash as it could provide some meaningful help with limited effort or cost. Although this is less important than other areas of flexibility in pension legislation, such as an ability to offer risk-sharing pension schemes where financial risk is shared between employer and members, our consultation submission proposes restricting lifetime withdrawals to “something equivalent” to the overall tax-free cash limits of 25 per cent of funds, suitably adjusted for timing differences.

The qualifying reasons for early access should be confined to a relatively short list. House purchase would be an obvious qualifying event, as might dealing with a mortgage (or rent) arrears. Other “life events” might qualify too. For example, university fees.

In the event that this sort of approach is deemed to be too difficult to legislate for and/or monitor, then a simpler compromise might be to permit access to the accrued but undrawn lump sum on, say, a five-year basis.

The qualifying reasons for early access should be confined to a relatively short list. House purchase would be an obvious qualifying event

One objection sometimes raised is that early access is likely to mean reduced savings to fall back on in retirement. In an over-simplistic model, where the saver is committed to a definite amount of saving and only the timing of the access is varied, this will normally be the case because of real returns foregone on the early withdrawals. But this ignores the fact that those early withdrawals might reduce other lifetime costs by virtue of their being met earlier. It is not, therefore, obvious that one can conclude that in the aggregate a saver with the ability to early
withdraw will be worse off in total when he or she retires.

At present, retirees can take retirement tax-free cash without any constraints as to how it is used. Under a sensible early access model, how sums are used would be more controlled and, in that sense, it is possible that imprudent spending of tax-free cash would be reduced rather than increased. It makes little sense to dismiss the idea of early access on the basis of it either being available already, for example, through Isas, or because it is not possible to definitively prove that early access will increase pension saving.

Few things are properly understood about pension saving but the evidence suggests that even those in their early 20s understand – and most are frankly entirely switched off by the thought – that pension saving means locking funds away for 30 years or more.

If you cannot see beyond the end of your student loan repayments or other expected cost obligations, are you seriously going to commit your limited funds to such a vehicle?


Joanne Segars
Chief executive, the NAPF

Someone once said “there is nothing more dangerous than an idea”. And that’s the case with giving people early access to their pension savings. In principle, letting people draw from their pensions before they reach retirement gives them more flexibility and control over their money and may encourage more people to save into a pension. But the reality is that it will leave people with smaller pension pots, particularly the lower paid. Early access is a distraction and not a solution. We are worried that people will dip into their pension savings as a quick fix, ending up instead with problems further down the line. And we believe the Government should be working to simplify the rules and regulation
around pensions rather than heaping additional cost and administrative burdens on pension schemes.

We have three specific concerns when it comes to early access. First, early access would cut people’s overall levels of savings.

Evidence from the US, where early access is allowed, shows that it reduces retirement income. And thanks to the effect of compound
interest, a small withdrawal in your thirties could mean a much greater loss in your late sixties.

The complexity of writing in every scenario relating to early access is likely to drive costs up towards the higher end of the spectrum

Second, the UK state and private pension systems are already some of the most complicated in the world, making it difficult for
people to predict with confidence what they will receive in the future. Scheme members may not fully understand the long-term effects early access could have on their final retirement income.

Third, pension schemes are already mired in red tape and requiring schemes to offer early access would be complex and expensive. In the first instance, schemes would have to amend their rules to allow early access. We estimate the one-off costs of amending pension rules to be between £25,000 and £100,000 per scheme. The complexity of writing in every scenario relating to early access is likely to drive costs up towards the higher end of the spectrum. On a day-to-day basis, schemes will have to manage early access applications which, in many cases, could require extensive research into and verification of people’s financial circumstances.

So, what’s the answer? We already have a powerful behavioural tool at our disposal – auto-enrolment – which has been shown to achieve participation in pension schemes of between 70 per cent and 90 per cent in some schemes. So let’s concentrate on getting Government plans to start auto-enrolling everyone into a pension from 2012 absolutely right.


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