Pensions rules ‘may be tweaked’ but Britons warned risk of ‘substantial negative effect’

'People put their heads in the sand' with retirement says expert

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Fluctuating income streams for those running their own business during the uncertain times of the Covid crisis has left many not wanting to send their cash away into a pension vault, which they won’t be able to access for decades. Due to the unprecedented situation the UK finds itself in, personal finance specialist Annabelle Williams has discussed the possibility of changes to pension rules which could allow savers more flexibility.

Many of these proposals are already in place elsewhere in the world, but by giving more options to those planning ahead for retirement, they could also bring substantial risk.

Ms Williams, personal finance specialist at Nutmeg gave her thoughts on the future of pensions.

She told “There’s always the possibility that today’s pension rules may be tweaked in future. Potentially one way the government could incentivise people to save for retirement is to allow withdrawals before the official age of eligibility in some circumstances.

“This isn’t unheard of – it’s allowed in other countries – and Britain often replicates policies that have been implemented abroad.

“When the COVID-19 pandemic broke out some governments, including Australia and Chile, allowed savers to withdraw some of their pension savings, with strict rules around who was eligible and how much they could take.”

Ms Williams explained: “Borrowing from one’s pension is well-established in the US where some employers allow staff with a workplace pension called a 401k to take a loan from their savings.

“There are limits to how much can be borrowed and the loan is automatically repaid from the employee’s monthly salary. This can be useful for people looking to purchase a home or pay off debt, and a lifeline in times of serious hardship.

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“If this was introduced in the UK and extended beyond employer-based pensions it could be particularly useful for the self-employed, business owners, entrepreneurs and others with variable income who find it particularly tough to pay into a pension regularly.

“Fear of locking up their cash in a pension, potentially for decades, is a real deterrent for people whose regular income streams can be disrupted by the loss of clients or changes to their industry.”

She continued: “In the US, pension loans are not an invitation to raid your retirement savings for no good reason.

“The loans accumulate interest which is paid back into the pension account as the loan is repaid – although the interest rates tend to be lower than bank loans. Borrowing from a pension does not affect a person’s credit rating either.”

Despite the potential benefits, Ms Williams warned that there is also a dangerous element to these possible new options.

She said: “It’s vital to emphasise that pre-retirement withdrawals can have a substantial negative effect on your retirement plans. But with the UK government planning to raise the age when people can access their pension to 57 from 2028, people may have longer to get their savings back on track after dipping in early.”

Ms Williams also spoke about some tweaks to pension rules that could benefit women, who have in the past earned less and therefore been able to put away less towards their pension.

She said: “Women have pension savings 40 percent lower, on average, than the typical man in the UK, and female life expectancy is longer too.

This savings gap is echoed around the world and is, of course, the cumulative effect of women earning less, on average, than men and also taking time away from paid work to prioritise family.

“To compensate women for the time spent raising children and not earning, Bolivia allows women to deduct one year from the state retirement age for each child they have, up to a maximum of three years. They must have contributed into the system for at least ten years.”

Ms Williams continued: “In the UK, it has been suggested that women receive a government contribution into their pensions for the time spent on maternity leave. The Social Market Foundation says that women perform labour worth £762.75 per week while on maternity leave and based on that figure, a three percent pension contribution would mean saving £1,189.89 a year for retirement. As for how this would affect government finances, the Pensions Policy Institute estimates such a scheme would cost around £1.2 billion annually, which is four percent of the annual spend on pension tax relief.”

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