pensions – taking a loan from your future self
26 July 2019
In the past, LCP has analysed the links between retirement and real estate, particularly in the context of people facing competing savings pressures. Last month, the UK Housing Minister called for people to be able to use part of their pension to get onto the housing ladder. Alex Waite explains why, with the right safeguards in place, this should be applauded as a sensible form of long-term saving.
Practice what you preach
Engagement on retirement savings requires trust and flexibility. Empowering future pensioners to take ownership of their pension savings, earlier in life, is essential when it comes to providing better outcomes in retirement. The more visibility and flexibility around savings, the more successful this empowerment agenda will be. This is a big part of the rationale behind the Pensions Dashboard, for instance.
The Housing Minister’s proposal is consistent with that aim, and would also help to capitalise on the momentum behind auto-enrolment. If policymakers remain engaged and continue to prioritise and promote innovative thinking around pensions, savers will too. Clearly, someone with a friend who gets on the property ladder purely because they ‘saved for a pension’ is much more likely to ‘save for a pension’ going forward!
Auto-enrolment came with a bang, and it makes sense to ‘continue the conversation’. For many, auto-enrolment was the impetus needed to make them realise that they have a pot of money accumulating for their retirement. The downside is that some will be left thinking “but what can I do with this pot of money?” If it is totally inaccessible to the saver for decades, then engagement can quickly decline due to the ‘out of sight, out of mind’ principle.
This, in turn, could drive low contributions and even auto-enrolment opt-outs. By contrast, proposals to allow flexible access to those savings, much as they do in the USA for example, would help to maintain the appetite for saving.
Given the volume of competing savings issues and other financial pressures on people today, proposals that promote flexibility and raise awareness can only be a good thing. This mechanism could be a good way of removing arbitrary lines or boundaries around different types of savings.
However, proposals that promote flexibility may not work on their own and will probably need to be supported with greater pragmatism in the tax system. Otherwise current tax rules could make proposals unworkable.
Creativity of thought
Regardless of the detail attached to this proposal, ideas aimed at providing greater flexibility should be supported and policymakers should be applauded for bringing creativity to the debate. The mere fact that public figures are talking about these options is beneficial in drawing more people (of all ages, but particularly younger people considering putting their first deposit down for a house) into the engagement net.
This proposal is a positive acknowledgement that there are differences in the way people now work, live and save. Younger people, in particular, are working and living in a less rigid and structured way. The rise of the gig economy, for instance, means we need to think differently about pensions to keep pace with modern business practices and new social ‘norms’.
In this new world of work, pensions may still come in fairly low down the list of financial priorities for many. However, our research (conducted in conjunction with YouGov) shows that, while people do care about long-term saving, their primary focus is usually on property over pensions (see chart below).
Source: LCP / YouGov data. NB: middle values (respondents who said that paying off a mortgage or saving for a deposit was neither important nor unimportant) have been omitted
Appropriate safeguards would be required, perhaps mirroring those already employed in the USA: savers could be empowered to take a loan from their DC pension of up to 50% of the balance, with a maximum of say £40,000. Interest would also need to be paid back, perhaps at the rate of CPI, over say a 10 year period, or by age 55 if sooner. This should ensure that the funds ‘borrowed’ are generally adequately replenished before they are eligible to be withdrawn.
The basic premise is that savers should be trusted and empowered to ‘take a loan from their future self’. People will be more prepared to save if they know they have access to that savings pot. While access will mean some people choose to take funds away, it also raises the likelihood of people topping up that pot. Above all else, it will bring people closer to their savings.
Not everybody has reacted positively to the Housing Minister’s proposal, with particular criticism from the financial advisory community. However, it is worth noting that some financial advisers are remunerated according to their funds under management and that, if this proposal were enacted, funds under management could fall. Whilst there is no doubt some genuine concern to ensure that any such system is working to help savers, it’s always important to have transparency regarding potential conflicts of interest.
In summary, flexibility, control and access (with appropriate safeguards) are the keys to savings success. The Housing Minister’s proposal ticks all three boxes, and I applaud it.
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