From the TUC

The government is right to reject early access to pensions

19 Apr 2011, by in Pensions & Investment

Here’s a sentence that I never thought I would write in a post about pensions. The Treasury are right to reject a DWP pensions proposal.

This is the change backed by Pensions Minister Steve Webb (but with cross-party support) to allow people to have early access to their pensions savings. But because of the tax and spending implications the policy is a Treasury responsibility. they have responded today to their consultation exercise to rule it out.

Financial Secretary to the Treasury Mark Hoban said: “The Government is committed to encouraging saving and wants to give individuals greater flexibility in saving for retirement.

“While early access has some merits, there is insufficient evidence to suggest it would act as an incentive to save more into pensions.

“We will work with industry to develop workplace saving to supplement pension savings.”

There are two usual practical arguments for change:

  • younger people might be inclined to save more if they thought they could get their hands on their pensions savings before they retire
  • people in genuine need – such as a homeowner in danger of repossession – should be able to access their pensions savings

In addition some think that we should stop having such a hard and fast division between pensions saving and other forms of saving such as ISAs. This is probably the logical conclusion of the first point – though you don’t have to agree with this to allow some limited pre-retirement access.

I am not sure that there are great issues of progressive principle here, and there are points to be made on both sides of the argument. But in my view the arguments for change are not strong, while the arguments against and the practical difficulites are stronger. This was the line the TUC took in our submission.

So here are some brief observations:

  • Advocates for change have not produced strong evidence that early access would increase saving. It seems to be more of an assertion.
  • Giving people in need early access also makes pensions savings available to creditors to attack in court. If you really cannot afford to keep on paying your mortgage, access to pensions savings will only postpone repossession while ensuring that you are poorer in retirement as well.
  • As everyone recognises it would be wrong to allow people early access to so much of their savings that it would mean that they would need to claim means-tested benefits in retirement, considering they have built up their pension in a highly tax-privileged way. Working out how such a limit would work in practice is fiendishly difficult. (While pensions tax relief is is glaring need of reform, that does not mean that pensions saving should not be rewarded through the tax system – it’s just that the wrong people get it at the moment.)
  • It is hard to make the case for employer compulsion if people can take chunks of their pension out to spend on a new car or luxury holiday.

So much as I hate to say it, on this the Treasury is right, and the pensions minister wrong.

2 Responses to The government is right to reject early access to pensions

  1. Tom P
    Apr 19th 2011, 7:52 pm

    Hi Nigel

    Completely agree with you. It’s a strange argument that more people would save for their retirement if they didn’t have to use the money they had saved for their retirement for their retirement. It’s like saying that more people would diet if they knew that they didn’t have to stick to a diet. errr…

    I actually do think there is a minor principle at stake here – the validity of an element of paternalism. I have heard sales people from insurers argue the need for ‘flexibility’ in pension savings, and argue that it’s nanny state-ish to not allow people early access. But most people don’t want to make decisions about savings, even though they say they should save more. (and if you want an economic argument they don’t get the opportunity to ‘learn’ their preference for higher saving until they retire and realise they didn’t put enough away, so it’s not like other market decisions.)

    As such this is an area where paternalism is justified and, I think, desired. so you’re right HMT came down on the right side on this one.

  2. Employment Law Manchester
    Apr 20th 2011, 6:47 pm

    I think that the idea of early access for state pensions is misguided. It is not a private pension fund, if people wanted early access then there are other ways to invest their money. The state pension should be seen as a last resort for people who hit retirement age and have no assets to call upon. Therefore people should be protected from themselves.