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Earlier access sought to tax-free sum

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  • Earlier access sought to tax-free sum

UK - A minister of the UK upper parliamentary chamber is calling on the government to alter pensions legislation and allow defined contribution pensionholders access to some of the assets during times of need.

Baroness Hollis, a member of the Labour Party, told IPE she is is meeting with James Purnell, Secretary of State for Work and Pensions, next month to discuss whether reforms can be introduced to the age at which the tax-free lump sum of a pension can be taken, to provide policyholders with access to some of the fund at key stages of their lives or in times of economic hardship.

In a recent reply to the UK's 2008 Queen's Speech - which sets out what the parliament will attempt to put into legislation during that year - Hollis claimed the conventional savings route which encouraged people to put money aside as "rainy day savings" is now "broke".

She argued the pressures individuals now face throughout their working lives could be abated if access to some of their pensions accounts was opened so pensions could also be opened as a short-term savings vehicle.

"Pensions have been designed by men in 40-year full-time waged work for other men in 40-year full-time waged work; they simply do not fit the lives still of most women, the finances of the low paid or the expectations of the young," said Hollis.

"DC schemes require you to start young and save continuously even though half of all women stop pension contributions when they have children. Men do not, of course. You are expected, on a rising income, to put sufficient aside, yet women's earnings peak at about 30, men at 45."

She continued: "Why not remove the time bar? What really is the point of ideologically and rigidly reserving the lump sum for a pension when it is not used as a pension? Why is it okay to spend it on a car at 55 but not to use it to save your home at 45?"

More specifically, Hollis has - and will argue in her meeting with Purnell - rules should be changed to allow policyholders to effectively take the tax-free lump at any age - rather than at 50 under the current terms - providing it does not breach the limits of the investments made, and should continue to be allowed to do so providing the sum invested is no more than a "de minimis" of their pot, such as £10,000 to £20,000, up to a cap of £80,000-100,000, to prevent tax abuse

Why not permit anyone reaching a de minimis in their pot of, say, £10,000 or £20,000, to ensure the savings habit, up to a cap of, say, £80,000 or £100,000, to avoid fancy tax planning, to draw down that 25 per cent as they need it? On £40,000 they could take out £10,000, and only if they rebuilt to, say, £60,000 could they then take 25 per cent of that increment—that is, a further £5,000.

She also bases her argument on evidence suggesting the tax-free lump sum is only used as an addition to their pension by 14% of people, and the money instead tends to be used "to repay debts or a mortgage, to buy a new car, a new conservatory or a cruise".

At the same time, she suggested were rules changed to allow such withdrawals, it might "reduce opt-out rates after 2012, including from personal accounts" and "encourage more people to contribute" as well as solve many of the reasons why people feel it is not appropriate to save in a pension.

She acknowledged the counter-argument could be it would be discriminatory against defined benefit schemes, though Hollis argued: "Unfair to DB schemes? Given that DC schemes halve the contributions from employers while laying all the risk on employees, rebalancing would be decent."

The concept is not a new one as the earlier label for such a proposed arrangement was the lifetime savings account, and proposed - similar to the US' 401k or the New Zealand KiwiSaver - some of the assets might be accessible at any time up to a certain percentage.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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