The government is looking at the options for making pensions more accessible, as it seeks to boost the number of people saving.
A consultation launched on 13 December is looking at the potential to giving people greater flexibility to access part of their pension funds early and outlines four options: a loan model, permanent withdrawal of some funds in limited circumstances, early access to the existing 25 per cent lump sum and a feeder-fund model linking savings and pension funds.
Financial secretary to the Treasury, Mark Hoban, said: “The government is committed to saving and wants to give individuals the maximum flexibility and responsibility for retirement. Early access is an idea we are keen to consider, and so today we ask pension schemes, providers and individuals to offer their evidence on the possible merits of any reform in this area.”
The government has already outlined plans to remove the requirement to annuitise a pension by age 75 for people with high enough incomes.
The foreword to the consultation states: “The Government is keen to encourage higher levels of saving by improving flexibility and promoting personal responsibility over financial choices. It is vital to encourage individuals to save now in order to have a good income in older age. By 2051, nearly one in four individuals in the UK will be aged 65 or over.”
As the purpose of pensions is to provide an income in retirement the government will be keen to avoid any unnecessary risks to pension pots that would see people left without savings to draw on in retirement.
This would allow individuals to borrow from their pension fund with a requirement to pay that amount back with interest, providing access to capital at potentially lower rates than other finance. Risks identified included reduced pension pot sizes if people stopped contributing while repaying a loan and loans being unpaid.
Similar to the KiwiSaver scheme in New Zealand, permanent withdrawal from a fund would be restricted for use in times of hardship such as facing repossession. However, this is a potentially complicated option creating an ‘administrative burden’ for the government and providers.
An important safeguard will be to minimise the risk of people making ill-informed decision leading to a significantly depleted pension pot in retirement.
Early access to the 25 per cent lump sum
Current legislation allows for 25 per cent of a pension fund to be taken as a lump sum from age 55. Allowing earlier access to this lump sum is identified in the consultation as requiring the 25 per cent to be based on projected fund values or allowing more than one lump sum withdrawal, also seen as creating complexity.
Versions of this idea include creating a product wrapper that includes Individual Savings Accounts (ISAs) and pensions. This could include an automatic trigger that meant savings in the wrapper went into an ISA up to a set limit and beyond that were invested in a ring-fenced pension fund (with pension tax relief).
One risk identified for this model is the prospect that an individual making regular withdrawals from such a pension/savings wrapper would never go above the trigger for savings to begin building up in the pension part of the product.
The consultation closes on 25 February 2011. The government said it will ‘carefully balance a consideration of the possible benefits of early access against the potential risks to individuals’ pension income in retirement, possible burdens on pension schemes and providers, and fiscal risks for the Exchequer.’
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