iStock_000017861768XSmallMost of us know we are not paying enough into our pensions, a fact confirmed by two recent reports. Firstly, annuity provider, Partnership, showed the average drop between pre and post retirement income is 40%, whilst figures from Aviva showed that 20% of people are not paying into any form of pension.

There are many reasons why most of us are not putting enough money aside for retirement by paying into a pension; cost, apathy, and mistrust are three. Lack of flexibility and the strict rules on how and when you can access your pension are two more.

Most of us know that once money has been paid into a pension, barring death or terminal illness, you can’t get at it until age 55, even in the most dire of financial circumstances. When you do hit 55, only 25% of the fund can be taken as a lump sum, the rest must provide you with an income.

We’ve often wondered whether this lack of flexibility and inability to access money paid in before the age of 55, puts people off paying into their pension.

So, we’ve asked some leading pension experts whether the rules should be changed to allow early access and if this would encourage more people to pay into pensions.

Dr. Ros AltmannRos Altman, Pension and Economics Policy Expert

Early access to pension funds would help people feel more positive toward pension saving. The current pension rules are far too inflexible – not only can the money not be touched even if desperately needed before later life, but there are restrictions on how the money can be withdrawn too. Of course forbidding access is intended to ensure the money is there in later life, but it feels to many younger people as if their money is being confiscated. If that puts people off contributing in the first place then it could be counterproductive.

We need to rebuild trust and confidence in long term saving. In the modern world, people are not so happy to just lock their money away and leave it to pension firms to invest for them for decades.

I suggest we consider redesigning the pension product for auto enrolment. The 4% contribution that comes from the employer and tax relief must stay locked as in the conventional pension, but the employee should have access to the 4% of salary they contribute themselves. That way, at least part of the money stays locked until later life, but the other part is available if needed. Restrictions could be imposed (although that might not be ideal) for example the money can be used for house purchase, to fund education, or for care etc.

Katie Morley, Personal Finance Writer, Investors Chronicle

If the government gives an inch on letting people grab their pensions early, they will probably end up being pressurized into giving a mile. And that would be devastating. Pensions exist so we never run out of money – therefore the fundamental rule of not being able to spend it until retirement should not be tampered with.

Employers really need to provide more flexible workplace benefits alongside pensions to help people build up savings they can spend if they really need to. For example, workplace ISAs into which employers contribute would be a really attractive prospect for staff – particularly for young people that are only just establishing themselves as financially secure. Forward thinking firms are already providing these kinds of benefits and hopefully others will follow suit.

Martin TilleyMartin Tilley, Director of Technical Services, Dentons

As a purist, and seeing as you have talked about “pension rules” I would come down on the side of: the deal is that you get tax relief on the contributions going in, you get tax free growth, you get 25% out tax free at a minimum age of 55 and the balance provides for an income in your retirement. Full stop. That is what a pension does. The deal has been sweetened by the ability to avoid an annuity and on member and on second death 45% of the funds are returned to loved ones and this effectively makes the deal tax neutral. Its not a bad deal and people should take it for what it is.

That of course assumes that the vehicle going forward will be called a “pension”. A new Long Term Life Savings Arrangement (LTLSA?) might be the answer which has a totally new deal on the table. If the legislators were starting from scratch, I dare say that would be ideal. But they aren’t.

On the other hand, setting aside the fact about loss of capital on death, which has largely been knocked on the head as above, the other argument against “pension saving” is the loss of access and this is where the early access option has been raised. From an HMRC/Treasury point of view, you are breaking the deal in wanting the money early, so correspondingly there should be something on the other side, such as loss of tax relief on the way in and there you have a solution, the ISA. I would always advocate considering a balance of long term saving in ISA’s first and pension second other than where a pension contribution is either mandatory or triggers a employer matching contribution for example.

The final argument, for early access in situations of dire financial need does have some merits (such as to avoid house repossession) and I would back this however I see it as almost unworkable in practice. The problem with a “means tested” benefit such as this is that where you have variables and assessments there is often no black and white decision and for every genuine individual who could and should use the facility there will one who tries to manipulate the position to take advantage of it. The legislation would thus need to be complex, advice might be required and assessment and administration of it could prove expensive.

In summary, I have to say that I can’t see a significantly strong enough argument for changing the existing rules. We have an established structure and whilst in an ideal world it would be good to start with a clean sheet of paper, we can’t and thus any change would require a raft of legislation, education and addition complexity involving cost, into what is already a far from simple financially legislated regime.

Mike MorrisonMike Morrison, AJ Bell

One of the greatest strengths of pensions is also perceived as one of their main weaknesses and that is the fact that you cannot get the money out until age 55.

The real down side of early access would be that the money is spent and therefore not available for retirement – i.e. the reason it received tax incentives in the first place.

However some controlled early access could perhaps be beneficial, particularly if linked to specific lifetime events.

The administration of such a system could be problematic – with administration, cost and consistency being high on the list of considerations

It should not be difficult though to say give access to all/part of a tax free lump sum to pay off, for example, a mortgage debt after age 50?

A couple of thoughts – would this assist with slowing down the growth in pensions liberation? I am not so sure.

How many people who would want to do this will have large enough funds to actually make a difference?

Ray ChinnRay Chinn, Head of Pensions & Investments, LV=

Early access has been debated a couple of times in recent years. Each time is has been ‘kicked into the long grass’ due to the complexities of introducing such a facility. There is now a growing case for tackling these challenges and for allowing some form of limited early access to pensions.

Firstly, there is the impressive initial uptake of auto-enrolment into workplace pensions. At a recent Pensions Net-Work seminar, Steve Webb MP, the current pensions minister stated the ‘inertia has been a great help’ in people auto-enrolling (i.e. not opting out). He then went on to describe inertia as potentially the greatest enemy for auto-enrolment, citing the need to now start engaging employees with their pensions to ensure that suitable levels of savings were achieved. Early access would be a great tool to support such engagement. A survey by LV= in 2011 suggested that around 25% of people may save more if early access were available.

A second driver is customers’ needs to access cash. With the age at which pensions can be taken having been increased to 55, we are seeing more people in the late 40s and early 50s looking to potentially dangerous ‘pension liberation’ schemes in an attempt to access pensions to provide much needed financial support as the current economic environment sees them struggling. Early access would provide these individuals with a much needed boost to their finances and see the pension liberation schemes rapidly dwindle. This in itself could achieve better outcomes for customers.

There are other arguments for early access and a fair few against. I for one believe it is now time for government departments, regulators and the industry to work together to provide sensible early access provisions. To do so would modernise our pension system, bring it into line with that of some other countries and support higher levels of long term pension saving for many.

Greg Kingston

Greg Kingston, Head of Marketing, Suffolk Life

We have an overly complex pension system thanks to decades of layered, largely uncoordinated changes.

Despite the possible attractions that forms of early access might deliver I just can’t get behind any proposal that looks at a further change in isolation of other considerations.

Without joined up, holistic thinking, we’ve now reached the point where no change for pensions might just be the best and most needed change of all.

What do you think?

Are you one of the millions of people not saving enough for retirement? Would you save more if the pension rules were more flexible? Are our experts right?

We’d love to hear what you think, leave your comment below and let’s get the debate moving forward.

In the meantime, if you would like advice on your pension planning our team of Independent Financial Advisers in Nottingham are experienced in developing retirement income strategies for clients the length and breadth of the UK.

Call one of our IFAs today on 0115 933 8433, alternatively enquire online or email info@investmentsense.co.uk

3 Responses to “Pensions: Should the rules be changed to allow early access?”

  1. Steve Gebbett says:

    Taking money early makes it into a “Pre-Pension”….if anything the demographic argument is pointing the other way, as your pension pot will have to last longer. Maybe the 55 age for access should go up automatically with morbidity rates-as the state pension age looks like doing in future Govt policy.

    Working longer, and retiring longer- the new imperative!

  2. Ray Chinn says:

    Despite my comments above in support of early access, I also empathise with the views of the ‘pensions purists’ – which is where my background is. I do, however, believe that now is the time to put aside some of those ‘purist’ views and focus more on what customers need. Not an easy job given existing regulation – I wouldn’t start from here – but one we need to embrace.

  3. Andy Leggett says:

    I laid my cards on the table in a series of 4 blogs, starting in December 2010 (listed here for anyone who’s interested or sad enough: http://sipphound.wordpress.com/category/early-pension-access/). So I’m with Ros and co. in favour of some form of early access.

    The martial arts fascinate me for the philosophy as much as the physical. The counter-intuitive is sometimes devastatingly effective. For example, in judo you have to learn a new response to being pushed: you don’t push back, you pull someone who pushes. Wham!! I believe a well-constructed early access mechanism would have the same effect: being able to take out means that so much more goes in in the first place.

    Those that argue that a pension is for retirement income, period, should consider what the current deal is. You can normally take 25% of your fund as a lump sum PCLS and spend it on whatever you like. Very few use it to provide an income for life. The only thing is, you have to wait until age 55 (although you don’t have to stop working). So what’s the big deal with early access?

    We need to go from hypothesising and debating to deciding. We don’t need to make up policy on the hoof, though. Advances in behavioural finance and related fields mean that practical experiments could be constructed to show how people decide under different scenarios. We could then have an informed decision on policy.

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