UK - The Pension Policy Institute (PPI) has claimed introducing early access to pension savings on a ‘loans and withdrawals’ model similar to the US 401(k) could increase the aggregate size of pension funds by 30% by 2050.

In a report entitled Would allowing early access to pension savings increase retirement incomes?, the PPI discussed the advantages and disadvantages of allowing UK savers to access pension saving before the current minimum age of 50 - 55 from 2010 - and highlighted four possible policy methods the government could adopt.

The UK government has in the past dismissed the idea of accessing pension savings early, including stopping the Rights of Savers Bill - put forward by the Conservative opposition party - in 2006 as it proposed a Savings and Retirement Account (SaRA) that would have had a similar structure to an Individual Savings Account (ISA) but would operate under pension regulations. 

However, the PPI report - commissioned by pension providers B&CE Benefit Schemes and Legal & General - suggested allowing limited access to money in pensions under specific circumstances, such as financial hardship, could increase the number of people saving and the level of contributions.

The report analysed four possible options:

Loans and withdrawals model - based on the US 401(k), which allows people to take out loans that must be paid back with interest, but in cases of hardship permanent withdrawals can be made Permanent withdrawals model - based on the New Zealand KiwiSaver, where withdrawals can be made under certain circumstances with no obligation to repay Feeder funds model - combination of pension fund and ISA, where contributions go into the liquid savings account first and then when it reaches a fixed limit future contributions are diverted to the pension fund Early access to lump sums - where members can take 25% of pension pot at any age providing the size of the fund is above a minimum amount but below a predetermined maximum

It revealed, in the most optimistic scenario, the loans and withdrawals model could result in pension funds increasing by £400bn (€472bn), or 30%, by 2050, however it warned if people stopped contributing while the y paid back the loans this could ultimately reduce the aggregate size of pension funds by 7% or £70bn.

Meanwhile, if the permanent withdrawals policy was adopted, pension funds could at best grow by 24% or £300bn by 2050 but at worst it could reduce the size by 11% or £100bn.

Feeder funds and early access to lump sum models would meanwhile have the “least variation in outcomes, with potential reductions in individual pot sizes at retirement age limited to around 15% and potential increases of up to 9%, in the most optimistic scenarios regarding higher contribution rates”.

That said, the PPI claimed while early access could lower opt-out rates post-2012, as well as incentivise ‘undersaving groups’ to save and assist with home buying, it could also create extra tax and administrative issues; be difficult for defined benefit schemes to employ and result in higher fund management charges.

The PPI also suggested some savers could avoid the need to buy an annuity by using the early access to reduce their pension pot to below the trivial commutation level, while tax charges may have to be introduced to stop workers contributing at one tax rate and withdrawing income at a lower one.

Yet the PPI pointed out the “overall effect will depend on the extent to which allowing early access encourages individuals to save more and the extent to which individuals actually exercise their right to withdraw funds early”.

Chris Curry, PPI research director, said: “There are many different possible ways of allowing access to savings within pension funds, and some are already in use internationally. The 401 (k) system of loans is well established in the US, and evidence suggests this early access increases both the number of people saving and the amount they save, even though only around 20% of people make use of the early access facility each year.”

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