Your employer could pay off your debts

In one influential expert's opinion, pensions need to be much more flexible. Perhaps they could be used for paying off debt or for a house deposit.

It's another fantastic idea from Ros Altmann, director-general of Saga, former adviser to the Treasury, and a true consumer champion. 

Altmann is frequently ahead of the game on pensions: spotting scandals years before they occur, at the front line in drumming up support to compensate victims, and thinking up innovative ways to make pensions work. 

It's the latter of her skills that I want to write about today. Her latest crusade concerns the inflexibility of pensions. It's an unattractive prospect to lock up your savings till retirement when you have little money, in case you then desperately need it when you become ill, are in danger of losing your home, or if you need to retrain or take time off work. The idea of “pensions or nothing” will leave many saving nothing, Altmann says. 

As more and more of us distrust the government and the industry on all types of pensions, more needs to be done to encourage saving and make it rewarding. As a solution, Altmann is suggesting we should be able to use our contributions for such things as repaying debts and saving a deposit for a house. 

Use your pension to repay debt

Otto Thoresen, director-general of the Association of British Insurers, admitted a few days ago that it might be better to allow workers to use pension savings to pay back student debt. 

Altmann has been pressing for this for quite a while already. In August, and not for the first time, she talked about one of the key problems with pensions: “The problem with pensions is that once the money is in, it is locked in for decades. For young people, that is a very off-putting thought.” 

However, by not saving in a pension, they lose a key benefit: their employers' contribution to their pensions. Most companies offer to contribute when you join their schemes and soon virtually all employers will be legally obliged to do so, if you contribute too. If you don't contribute, you lose that valuable bonus. 

If we were able to use similar schemes to repay debts and get an employer contribution on top, it would be more attractive for millions of people. Ros Altmann gives an example: “Students should be given the option of being auto-enrolled into a student-debt repayment plan as well as a pension and they can then choose.” With many students projected to have £50,000 of debt, this could be a welcome idea. 

If the government granted tax relief on student-debt repayment plans – since they do so on pensions already – then the benefits would be of even greater value. 

Use your contributions to save a deposit

Altmann believes that most basic-rate taxpayers are currently – probably – better suited to using ISAs than pensions. This is why she has also suggested we could get people in the savings habit by allowing them to save a deposit for a house, with employers contributing. 

Many younger people believe that getting on the property market is a much more pressing matter than saving for their old age, and the rewards are more assured than pensions. Similar schemes already exist in Germany and they work well, with employers often doubling contributions up to a specified limit. 

The downsides of not saving for retirement

Starting to save for retirement early is very important, whether you use share ISAs or pensions. If you could start saving with 35 years till retirement, but you choose to wait five years and save for just 30 instead, you'd be amazed how large a difference it is likely to make to your final pot. Thanks to the way money begets money at an ever increasing rate, those extra five years could give you much faster growth in the end. 

That's why, if your debts are cheap, it can make sense to pay into a pension first. However, you still need to make plans and provisions for emergencies. We invariably suffer large numbers of small problems, such as needing to pay for an urgent taxi to the airport or losing our wallets. We have intermittent bigger emergencies, like paying for major car repairs or, as I have experienced, needing to book a sudden flight and buy an emergency suit on the go. Then we have the occasional catastrophes, such as losing our jobs. 

If we had more flexibility, people would be encouraged to prepare for short-term problems while also getting into the habit of making contributions for important long-term pans. In short, more flexible schemes will surely mean more of us take better care of our finances. 

In Altmann's final comment about Thoresen's cheering speech, she said: “Creative thinking, taking account of people's lives, is urgently overdue. I hope that we may be seeing the first signs of the industry itself recognising the need for change.” 

More: Compare share ISAs through lovemoney.com | Quality, free advice on your pension | Your pension rights if your employer goes bust