Opinion: early access to pensions makes sense – provided there are safeguards in place

Making it easier to access pension pots ahead of schedule could boost their appeal, writes John Fitzsimons.

Pensions should be revamped so that savers are able to access the funds they have saved ahead of schedule, without facing the punishing repercussions that are in place currently.

That’s the call from think tank Resolution Foundation, which noted that as things stand, savers trying to get money from their pension pot before the age of 55 will be smashed with a tax rate of a whopping 55%, unless they are terminally ill. 

However, Resolution called for this to be adapted so that it is easier for savers to tap into those funds, with the ability to effectively borrow money from their own pot ‒ up to 20% ‒ on condition of it being mandatory that the money is paid back, with interest on top to reflect the ‘growth’ lost as a result of the early access.

It’s an interesting idea, and could actually boost the appeal of pension saving itself in my view. 

Keeping it simple

One of the best arguments for opening up access in this way is that it simplifies the way that we save money.

At the moment savers are pulled in a few different directions when it comes to how they handle the money they set aside.

Obviously, a pension is incredibly important, with constant warnings around how important it is to get started as early as possible in order for those sums to add up.

However, there is an even more pressing need to get some money set aside in emergency savings too, to cover you in the case of an emergency.

The last few years have shone a light on the importance of having a savings safety net, to help you cope when things go wrong and you need to be able to get your hands on cash quickly without having to borrow.

The trouble is that millions of people have virtually nothing saved at all. Indeed, this is precisely why the Government launched its Help to Save scheme, with the intention of encouraging Brits to get into the savings habit by offering a cash bonus from the Government to top up those savings.

Essentially, if you have a few quid left over at the end of the month to set aside for the future, you need to split it in two and devote some to savings and some for your pension.

Opening up easier access to the pension pot would remove this, and make it simpler.

There is even the potential that people will be more likely to save into a pension if they know that there is at least the option of dipping into it early when absolutely necessary.

Saving without realising it

One suggestion that I really like from Resolution Foundation covers how to get people saving more, without necessarily noticing it, through the expansion of the auto-enrolment scheme.

Auto-enrolment has been incredibly effective in getting people to pay into pensions, forcing employers to not only open a pension for their staff but contribute into it as well.

But it could also be utilised to help people build a savings safety net.

The idea is that the minimum contribution should be increased from its current level of 8% of your salary, but as that minimum goes up, a portion is devoted towards a savings ‘sidecar’. 

Then once you reach the point that you have £1,000 in savings, the full monthly contribution can once again go towards your pension.

Now let’s be honest, £1,000 doesn’t always go very far, particularly given the rate of inflation over the last couple of years ‒ all you need is for the boiler to pack up and it’s likely all gone. 

But it’s a good start for smaller issues, with the ability to borrow from your own pot should larger sums be needed.

Where did my pension pot go?

There are downsides to the idea of earlier access to pension pots though.

Clearly, there would need to be some pretty strict rules in place covering not only the circumstances in which you can withdraw from your pension pot, but also how much can be taken out.

Without those safeguards in place, it would be far too easy for a saver to reach retirement and discover that they don’t have anything left.

There is also the danger of mixed messaging. Pension saving involves taking a long-term view, accepting that the money you set aside today won’t be accessible until your later life.

Making it less painful to access that money earlier on does have the potential to somewhat undermine that message, to undercut the idea of being responsible over the long term.

After all, we already know we aren’t saving enough for retirement at the moment, opening up the ability to access the money we do save, ahead of schedule, can seem a little counterintuitive.

Learning lessons from overseas

It can be useful to look beyond our borders when it comes to encouraging better money management; auto-enrolment was imported from Australia, for example.

And Resolution Foundation argues that the UK is unusually strict when it comes to how difficult it is to access pension pots early, should a significant need arise.

It noted that it’s quite common for there to be some flexibility when there is genuine hardship in nations like Australia, Canada and New Zealand. 

There is also a closer tie-up between pensions and property. In

New Zealand savers can access some of their pension pot to use as a deposit, while in South Africa borrowers can take out a loan against their pension savings to use as a deposit.

In the US, savers can access their pot at any time, with the proviso that they pay tax and incur a 10% penalty.

Alternatively, they can borrow money from their pot, up to a limit of 50% of the pot or $50,000, without incurring a penalty so long as the money is repaid.

The experiences of other nations suggest that there is room for more flexibility over how our pension pots are handled and accessed.

A fresh approach to access to our pensions could leave us all better off, both now and in our retirement.