Yorkshire Post – Unlocking Pensions could lead to better savings culture
by Dr. Ros Altmann
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The Government is determined to reinvigorate pensions and has unveiled a whole host of reforms that it is considering. The latest one is a consultation on allowing people to take money out of their pension funds early if they need to. Allowing people to unlock their pensions moneybox could help overcome the long-term savings crisis and could be fantastic news.
Pensions are a special kind of savings product, in which people have to put their money in a ‘locked box’ that they cannot touch until they reach their mid fifties. This is so old-fashioned.
Unfortunately, at the moment, Government policy treats pensions as the only meaningful long-term savings vehicle. It’s pensions or nothing as far as getting an employer contribution is concerned, so if you are not willing to tie your money up until later in life, you may lose out on the benefits of a long-term workplace saving scheme altogether.
However, many people in their twenties and thirties, particularly if they have debts or if they cannot be sure they will never need the money in their pension fund before their fifties, find the idea of pensions too daunting. They don’t want their money ‘confiscated’ for decades, never being allowed to touch it even if they need it. And they have also been put off by the succession of scandals surrounding pensions in recent years. They have heard of high charges, poor returns, falling annuity rates and these have all undermined confidence in pensions. We used to have a brilliant retirement savings culture in this country, but in recent years this has fallen apart. How could it be restored?
Allowing people to take at least some money out could encourage more people to contribute in the first place. The people most likely to benefit will be ordinary workers who may feel insecure about their future prospects and who can least afford to save. These are, of course, the very people who will be likely to benefit most from long-term saving as they get older. Pensions work well for top rate taxpayers, but only the top 12% or so of taxpayers actually pay higher rates. The majority of the population are on basic rate tax and basic rate tax relief is often just not enough of an incentive to justify the restrictions of pension saving.
But, if people do not contribute to a pension, they will not get the employer contribution. Yet, in the future system of automatic enrolment, it will be the employer contribution, rather than tax relief, that is the most valuable. Anyone who puts 4% of their salary into a workplace pension scheme will have to receive another 3% from their employer (plus a further 1% from tax relief). But, if they save in an ISA or other product, they will lose that 3% employer contribution altogether.
Why should workers be denied their employer’s contribution just because the pensions vehicle is not suitable for them? Long-term saving does not have to mean only pensions. The important thing is to get people to save. If it is not in a pension, that may not always matter, as long as they get used to saving.
Yes, there is a risk that some people will spend the money before retirement, but it is their money and, if they do really need it, should they not be allowed to have it back (minus any tax relief of course)?
A modern benefits package could put people into a workplace savings scheme, not necessarily just a pension, deducting some of their salary each month, topped up by extra from their employer. Younger people could even use this to pay back student debts, some may use it to buy a house and others will use it for pensions, but only if that suits them.
Of course, pensions are what the financial industry wants, because they are a captive pool of money to earn fees on for many years, and in theory it is best to ensure people cannot get money out and spend it before retirement. However, in practice, if that means people will not put money in at all, then we have made the best the enemy of the good.
By allowing more freedom and flexibility, we could harness the power of the employer contribution to generate more savings overall, and encourage more into the habit of saving, without putting them off before they start. Pensions are really old-fashioned. The more we can allow people freedom to choose what savings vehicle suits them best, the better.
Employer saving schemes could allow workers to choose whether they want pensions or ISAs – both vehicles have their merits, especially for basic rate taxpayers. Why not introduce a fixed term ISA, say 5 years, so that people can get used to managing without that money, but could get it back if they really need it? By forcing people to choose between pensions or nothing, many workers end up with nothing. They do not save at all, when they could benefit greatly from employer contributions others will get.
If we are serious about restoring a savings culture, allowing more flexibility in pensions is a must.