Saving for retirement through registered pension schemes has lost some attractions in recent years following disappointing investment returns, falling annuity rates changes to governing legislation.
There is a general political cross-party acceptance that more emphasis needs to be placed on the responsibility of individuals towards long-term saving.
One of the main reasons why people might be reluctant to make use of pension savings is the limited degree of access to their capital. For the most part, the earliest they can take benefits is 55 and then can only take 25 per cent in cash with the balance used to provide income. The Government stated it would explore the potential for access to part of their private pension fund early. On December 13, it issued a consultation paper to canvass views and the consultation closed at the end of February.
Early access to pension savings is available elsewhere in the world, notably in the US, but there are downsides. Taking funds out early will affect investment performance and the benefits at retirement. If the individual does not take steps to replace the capital then the result could be a smaller pension income and a need for state support.
On the other hand, access to funds to reduce debt, to help in times of financial hardship or to forestall repossession of a home, could not only help beleaguered individuals but encourage greater engagement in the saving process.
There is a balance to be struck as to whether the ability to access capital would have a sufficiently positive effect on pension savings to outweigh the perils of smaller funds and reduced income in retirement. If people can be encouraged to save more because they know they can get to part of their capital when they need it most, this should have a very positive effect on the overall culture of retirement saving.
In its paper, the Government identified four potential options –
- Allowing individuals to borrow from their pension fund, on a temporary basis
- Accessing their tax-free cash sum earlier than 55
- Taking a proportion of the capital out, without the obligation to repay it (say, to save their home or to ease financial hardship)
- Merging savings products in some way to create a vehicle that could be used for retirement and non-retirement purposes
There is no doubt that pension saving has lost some gloss and this flexibility could rejuvenate interest.
In practice, pension savings are one means of providing for our future but our needs change during our lives and modern lifestyles require more flexible options. It will be interesting to see how this will be developed.
Stephen Greenstreet is managing director of Origen Financial Services