Yahoo Finance Why we must let young savers tap into pensions for property and emergencies
We in Britain are not saving enough to protect our financial futures – and there are common reasons why.
For many, locking away cash in a pension when they may need it sooner for a financial emergency, or as a deposit to getting onto the housing ladder, prevents greater levels of savings.
We need to fundamentally rethink how we approach lifetime savings, not only increasing the amount we are all putting away, but introducing flexibility into the system so we can access our savings when we need them most.
The case for emergency access
Auto-enrolment has represented a step change in savings habits, but 8pc of salary is not going to be enough to secure even a moderate standard of living in retirement. The statutory level of savings does need to increase, but we should make those reforms in a way that also allows us to address the challenge of financial hardship in the short term.
Many people don’t have enough money put aside to cover them in an emergency, let alone to provide a long-term income in retirement. The statistics are sobering: 14.5 million people have no savings for a rainy day while nine million pay for essentials on credit.
People shouldn’t have to choose between financial security now and in their future.
We could introduce a hardship facility that can be integrated with retirement saving, allowing savers to access up to £1,000 on up to five occasions to help deal with times of financial hardship throughout their lives. This could more than 14 million people avoid problem debt each year.
Our research indicates that 59pc of savers between 30 and 40 would find saving into a pension more attractive with this feature.
Using your pension to pay for property
There has been a lot of discussion recently around changing pensions rules to help first-time buyers get onto the property ladder. Developing a closer relationship between saving for a home and saving for retirement is critically important to help address both issues.
We envisage young people being allowed to withdraw up to half of their early pension pots, to go towards a deposit on their first home. However, to ensure we protect their longer term financial futures, it’s vital that we also increase savings rates so that pots are big enough to support this more flexible access to savings.
Helping young people to save more, earlier, will boost the amount of money they have available to put towards a deposit and reduce the time they spend saving for a house instead of their retirement. Combined with our other proposals, it could double the disposable income of those in retirement.
Of course, we require appropriate policies to ensure an adequate supply of housing and improve affordability. However, this policy is focused on helping young people to move from renting, not to increase demand for housing.
What about the self-employed?
While the introduction of auto-enrolment has brought more than 70pc of all employees into the savings fold through statutory pension contributions, the regime doesn’t support the nearly five million self-employed people in Britain, almost 80pc of whom are not saving for retirement at all.
Access to their savings would also increase the attractiveness of pensions amongs these workers. Our research suggests that 45pc of young people who are self-employed would save more for retirement if there was a facility to have limited access to funds on a rainy day.
How much is enough?
Simply put, savings rates need to increase. Contributions of 15pc are required to deliver a moderate standard of living in retirement. Agreeing who pays these increased contributions will be one of the main talking points of this discussion – we think that this responsibility should be shared between individuals and employers.
This should provide the basis for a system built around a default position. People should have a retirement income that for average earners equates to two-thirds of their working income. If people wish to have a different level of retirement income, they should be able to follow a set of simple rules of thumb to see how they can achieve their saving goals.
People also need to believe that their savings remain theirs and to have the flexibility to save in a way that reflects any changes in their lives. Enabling people to access their money earlier in certain circumstances if they need it will increase engagement. It will give people more of the flexibility they need.
Pete Glancy is head of policy at Scottish Widows
