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Early warning

Early access to pensions could lead to much higher charges

John Lawson

The Government’s call for evidence on early access to pensions ends soon. Based on the tone of the paper, Treasury enthusiasm for this project looks in short supply.

This debate falls into two camps. The first says that by telling people they can get their money back if they really need it, more people will save in a pension in the first place. And those that are already saving will save more if they know that their money is not locked away forever.

The doubters say that people will naturally seek to access as much of their pension as they can get their hands on as early as possible. The result will be millions of people living in pension poverty a few years down the line.

Evidence to support a change is weak. There are lots of non-pension savers who say they would save if they had a money-back option but it is not clear if these people are currently saving at all.

There are three main early access options offered for discussion. The first is loans. On first reflection, this appears to be the most difficult to execute. Pension schemes lack the systems, skills and regulatory authorisation necessary to offer loans to their customers. The cost of building this capability and the ongoing administration expenses would add too much to costs, which in turn would result in much higher charges.

The second option is a perm-anent hardship withdrawal. Hardship has not been defined but could include people at risk of mortgage default or personal bankruptcy. These withdrawals would require a degree of underwriting before a withdrawal could be paid. In addition, the likely number of applicants would probably far exceed those who are successful. Like pension loans, this adds new expensive admin activity, with pension savers again picking up the tab through higher charges.

The final option is early access to the tax-free lump sum. While this would be easiest and cheapest to administer, paradoxically, this solution could result in the highest increase in charges. Because it could prove more popular than the other options, more funds are likely to be withdrawn early. With falling funds under manage-ment, investment and admin providers would no longer collect the charges they might otherwise have expected to had this money remained untouched to age 55. The result would be higher charges in order to recoup the same level of income from a smaller pool of savings.

Whether any of these options is to the long-term benefit of savers is also quest-ionable. While withdrawals could theoretically stave off home repossession, there is little evidence to suggest that those most at risk of repossession, the under-30s, have enough in their pension funds to make much of a difference. Then there is the consequent reduction in funds available at retirement.

Further study on the feasibility and effect of these potential changes is needed before we proceed any further. Until then, the jury remains out on early access.

John Lawson is head of pensions policy at Standard Life

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