ACA: Early pensions access could encourage people to save

This is according to evidence submitted by the Association of Consulting Actuaries to a Treasury Select Committee inquiry, launched in July, to examine whether the current suite of tax reliefs represent good value for money.

The ACA said too many people do not have a cushion of adequate, immediate-access savings that would cover unexpected costs.

With competing savings needed for housing and student loans, the industry body believes there is a risk that recent negative economic shocks, such as the pandemic and high inflation, will “undo” the work of policy developments such as auto-enrolment.

It said this makes it harder to persuade people to lock away significant savings until retirement if much of the UK population lacks savings to cover unexpected costs — from a broken-down boiler or car, through to unexpected redundancy and not having wages for a period until they find a new job.

The ACA cited countries such as Australia and New Zealand, where younger generations can already gain early access to retirement savings through various products. People in the UK cannot currently access their pensions until age 55.

“One option would be to allow more flexibility for people to dip into retirement savings before retirement to meet urgent, essential expenditure,” the industry body said in its evidence.

It added that allowing individuals to access their retirement funds early is also consistent with the “freedom and choice” rules that were first introduced in April 2015, giving people more flexibility as to when and how they access their defined contribution pension savings.

An ACA survey last year found that 73 per cent of respondents believed aggregate savings would increase if there was greater flexibility.

The industry body’s evidence also looked at pension tax relief more generally and potential improvements to it.

Pension tax relief cost HM Treasury £42.7bn in 2020-21. The ACA said this tax relief has been good value for money, that occupational pensions provide more income than the state pension on average, and that the uptake of private pension income has been rising. 

It said 74 per cent of pensioners received a portion of this income in 2021, more than previous years. But there is still too much complexity, it added.

While the ACA said a “degree of complexity is inevitable”, it also said there were “insufficient government resources” devoted to developing and maintaining the rules around pension schemes and pension tax relief.

“Rules are also poorly understood by the general public, and this also possibly dilutes the positive, overall impact on incentives to save into pensions,” it said.

“Going forward, we would prefer quality over quantity of legislation, even if it meant that legislation was slightly slower in arriving on the statute books, and we would prefer to see more resources devoted to creating and maintaining high-quality tax laws.”

Chair of the ACA pensions taxation committee Karen Goldschmidt explained that for pension tax relief to be effective, people need confidence that the regime will be stable and that they can make the long-term commitment over decades to build up a secure retirement income.  

“Especially given their now wider population coverage, we believe tax relief limits — but particularly the lifetime allowance — should be restored to a more appropriate level with automatic annual indexing built in and respected,” she said.

The Treasury has been approached for comment.

This article first appeared on FTAdviser.com