View more on these topics

Easy access pension proposals will not encourage more saving

A few weeks ago, I mentioned I had been engaged in a process of assessing the performance of my various pension funds and other investments.

As almost no one believes the state is an adequate guarantor of financial security in old age and, unlike some colleagues who are blessed with long-term membership of a company pension scheme, I have long saved for my retirement.

Thanks to past financial advisers, I have not confined myself to personal pensions and my money is also held in Isas, although the distribution of funds owes as much to luck as judgement as well as topping up my savings to the max each year within a tax-free environment.

Either way, the fact that up to a quarter of my retirement fund is held in assets that can be liquidated relatively easily regardless of my age means it meets many of the key criteria of the Government’s recent consultation paper on providing easy access to pension savings.

Although I have faced some tough financial challenges in the past 20 years, it has never led me to cash in any of my Isas or Peps. That it not to say I have not been tempted a few times, less because I was skint and more because I could contemplate alternative uses of my money other than leaving it stashed away for my retirement.

For example, a couple of years ago, I was drawn by the idea of building my own home. I had the money for the plot and most of the construction costs but I was a few tens of thousands short and using my Isas to make up the difference seemed like a good plan. It was only my partner’s common sense – she pointed out that building costs always overrun by at least 10 per cent, which would leave us on the breadline for another 25 years – that prevented a mass cash-in of assets.

Which brings me back to the Government’s consultation paper, which closed last week. Most of us can see the attraction of saving in a long-term fund that allows access to some or all the money in times of need. Such a view also strikes a chord with the public. The Treasury’s own consultation paper cites evidence from the Department for Work and Pensions, which suggests that among those not currently saving into a pension, 34 per cent say they would be more likely to do so if they could access savings before retirement.

Among existing pension savers, 26 per cent say they would be likely to save more if savings could be accessed before retirement. At the same time, a survey from the ABI shows 28 per cent say an option to access part of their pension early would encourage them to save. In fairness, 47 per cent say it would make no difference and 6 per cent say they would be less likely to save. But the key statistic here is not the majority unimpressed by such a proposal but the minority that is.

Faced with these arguments, plus the possibility that thousands of young people may never be able to afford to buy their first property, it is easy to see how early access to at least some of your retirement funds can seem attractive.

My worry is that despite all the best intensions of those who want us to save more, which is an aspiration I share, this proposal will not do it.

First, it is not clear to me that part of the purpose of incredibly generous Government tax relief on pension contributions, certainly in the 40 per cent income bracket, ought to be diverted to finance home purchase.

Second, I am not convinced it is a wise idea for people to be told that if they are really stuck they can use some of their future retirement savings to enter into even more debt in the here and now.

Third, although this is likely to lead to accusations of “dirigisme”, I have a gut feeling that if left to their own devices, too many people will go for the soft (or in my case, the stupid) option in the here and now, even if it stands to cause them future pain. If we go down the immediate access route to pension savings, prepare for an even greater number of people with inadequate retirement incomes.

Finally, the real problem is that most people cannot afford to save anyhow. In the DWP survey, 51 per cent agree with the statement that they cannot afford to put money aside for retirement at the moment, with 15 per cent strongly agreeing. Only 36 per cent disagree.

Those least able to save include the sick, disabled and economically inactive, or those with a household income of under £12,000. Early access to pensions is not going to turn these groups into savers.

In essence, this consultation paper will not help those for whom it is intended and could seriously damage the financial health of some who believe it may help them. As General De Gaulle once said of the May 1968 rebels in France: “Reforms, yes, but no to crap in the bed.”

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

There are 11 comments at the moment, we would love to hear your opinion too.

  1. What would Nick have to say when you have someone in a Group Money purchase scheme with a good number of years service and lets say £200,000 in pot is made redundant and could lose his/her house etc. Early access could stop this

  2. Tell ya what! Pay some commission on a pension and maybe someone would be happy to sell the dam things again! Stakeholder not only removed distribution costs, it removed distribution and we are about make the same mistake all over again with RDR.

  3. What “access” should mean is the ability to borrow from your pension fund at a commercial or at least sensible rate for any major purchase or reason subject to a clearly defined repayment schedule.
    As far as I am aware the American 401K which is broadly equivalent to our SIPP allows such loans and is hugely popular; the sheer remoteness and inaccessibilty of a pension fund in the UK environment is what puts many younger people off saving in a pension.
    Yes such savings should be split (not necessarily 50:50) between ISAs and pension contracts but we need to make the pension route more attractive-this is one way we could make a start.

  4. John Blackmore 6th March 2011 at 4:23 pm

    A minimum level of contribution to a retirement plan ought to be compulsory. No one has the right to be poor and then expect the rest of society to bail them out. The minimum level should be set so as to make the saver ineligible for any state support. Fooling around at the edges with ideas such as early access is a complete waste of time an only panders to the modern lack of any personal responsibility.

  5. Julian Stevens 7th March 2011 at 9:50 am

    And what about the government’s promise in its election manifesto to undo all the damage inflicted by Crash Gordon to confidence in retirement saving?

    What about repealing the tax raid on dividend income? What about restoring Contributions Insurance (WoP)? What about restoring life cover (subject to a minimum level of contributions to retirement benefits)? What about a viable alternative to the annuity trap (the Pension Income Bond, which would get round the problem of unisex annuity rates)? What about lifting the LTA? What about simplifying input limits to 30% of gross earnings without limit (given that the new limit affects only a very small proportion of the population)? What about allowing unspent funds in retirement to pass tax-free into retirement plans for the next generation?

    Were the promises to “reignite the UK savings culture” just a load of empty rubbish to garner votes? Is it any wonder nobody trusts politicians?

  6. What a vapid, navel-gazing little piece. I do not understand how you get paid for your increasingly juvenile take on the financial services industry.

    I can easily picture you popping out to the pub on Thursday/Friday lunchtime, jotting your self obsessed musings on the back of a fag packet, then dropping resultant tosh on some poor chaps desk for copy editing.

    I think I will commission a prize. The Cicutti Cup, awarded for extreme vapidity.

  7. But you still read it Kershaw. Every week without fail you find the time to read and then comment on these ‘vapid little pieces.’
    And the fact that you manage during your idiotic personal little rant to accuse someone else of being ‘juvenile’ is, quite frankly, laughable.
    Grow up. If you don’t like it, don’t read it.

  8. Waz.

    Says it all really.

  9. Johnny Weissmuller helped by Cheeta 7th March 2011 at 9:55 pm

    OK you get tax relief but the dividend tax credit has gone thanks to Golden Brown and his pension tax raid!

    Ok you get tax free cash but the pension income is taxed in payments.

    Ok so you don’t need to buy an annuity but the funds are taxed at 55% on death.

    Ok so Stakeholder pensions are cheap but the target market is means tested in retirement and nobody is being paid to sell pensions.

    The Retrospective Pensions mis-selling scandal made pension planning high risk and Stakeholder made it low return!

    Lets put a Chimpanzee in charge – he’d make a better job of pensions. Where is the incentive to save and where is the incentive to sell?

    Regards

    JOHNNY & CHEETA

  10. “Kershaw”.

    Ancient Saxon for ‘use of personal insults to deride views opposite to your own irrational blinkered belligerent thinking’

    Says it all really.

  11. Such fun! Let’s do a Google..

    Cicutti name – origin 100% Argentinian.

    Argy Bargy, says it all really!

Leave a comment