Four options for allowing early pension access are set out in the Treasury’s consultation paper on early access to pension savings. The method of allowing early access is also important to its success. These 3 don’t make my cut:
“A loan model: allowing individuals to borrow from their pension fund”
This option involves administering loans, debit interest, repayments, late payments, attempting to recover non-performing loans – it immediately looks expensive to provide. If early access is being considered for reasons of hardship, expense won’t help. Nor will the complexity. This model is used in the US where the number of 401k loans has been soaring – evidence, I fear, of the “double-or-quits” gamble with one’s pension. If you are unable to repay your 401k loan, you risk tax charges. It’s all subject to various terms and conditions – and here’s an example of 401k loan repayment difficulty questions. Our survey says: uh arh!
“A permanent withdrawal model: allowing access to funds without repayment obligations – possibly in limited circumstances, such as cases of hardship”
Here we go again! “Limited circumstances”, “hardship” – the difficulty of defining these, the expense for pension providers (which will get passed on with a mark-up to the desperadoes) should be setting off the warning alerts.
It gets worse. How would these withdrawals be taxed? Presumably 25% could be tax-free in just the same way that a lump sum is available at retirement. How would the rest of any withdrawal be taxed? At the individual’s marginal rate? What if last year someone was a high-flying youngster, taxed at 40% but now finds themselves unemployed – would our high-flyer be able to withdraw up to the HRT threshold and pay only 20%? And what would be left in the pension fund? In extreme circumstances, nothing! This option looks a bit like flexible drawdown only available at any age and without the need to secure a minimum retirement income (i.e. the minimum income requirement). In fact, it looks quite a lot like an instant access account.
Complex, expensive and potentially highly dangerous. A big raspberry for this one.
“A feeder-fund model, creating a more flexible savings product linking liquid savings products, such as ISAs, and pension savings together into a single account”
There’s a huge irony about this option: it already exists! What’s more, it’s little used. This option was put forward in a mighty tome from the Centre for Policy Studies entitled Simplification is the Key. I can’t help feeling sceptical of the option. If people are already struggling with the complexities of short- and long-term savings, being taxed on the way in vs on the way out, I can’t see how putting them together is going to help. Again, it’s a no.
Two things are in providers’ and savers’ mutual interests: that early access be simple and inexpensive. Fundamentally, that’s why these 3 options are non-starters.