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Early access to pensions would deepen retirement problems

27 February 2011

Letting people dip into their pension before they retire could increase dependency on state benefits and create a bureaucratic nightmare for pension providers, experts warned today.

The National Association of Pension Funds (NAPF) said that allowing early access to workplace pension pots would damage overall retirement savings, undermining the Government’s drive to auto-enrol workers into a pension.

The UK’s leading pensions body said the extra flexibility of early access would only encourage a minority to save more into a pension, while a seemingly small withdrawal could cause a heavy fall in the final value of a pension.

Such losses would leave even more people dependent on a low and complicated state pension system that is in urgent need of reform, the NAPF said in its response to a Government call for thoughts on early access.

Joanne Segars, NAPF Chief Executive, said:

“The UK is facing a crisis in saving for its retirement, and far too many working people are going to rely on one of the lowest state pensions in

Europe. So ideas that make workplace pensions more flexible and attractive must be explored.

“But offering early access to a pension is a distraction, not a solution. People will be tempted to dip into their pensions as a quick fix and instead end up with a serious, long-term problem years down the line.

“Auto-enrolment is a much better way of boosting pension saving, and the Government should focus on getting that right, rather than adding extra layers to an already complicated system.”

In its response to the Government the NAPF cited its Workplace Pensions survey, which revealed that 44% said having early access into a pension would make no difference to their contribution levels.

And it pointed out that in the USA, where early access is allowed, pensions that offer early access only see a 6% increase in uptake among individuals when compared with pensions that do not.

Early access could also damage retirement saving outcomes. A study by the US Government Accountability Office showed that a low-earning 35-year-old who took a $5,000 hardship withdrawal out of their pension would end up losing $30,000 in retirement.

The NAPF, whose members run pension funds affecting 15 million people, also warned that forcing pension providers to allow early access would make running pensions much more difficult.

Joanne Segars said:

“Pensions are already mired in red tape and this is another burden that they don’t need. It will be time-consuming to calculate how early access might affect an individual’s retirement income, and it will then be difficult to try to communicate that to them.”

The NAPF also said that if early access were allowed for hardship reasons, such as to cover a job loss, then pension providers and trustees would face the difficult task of investigating and judging individual cases. The NAPF believes a better route would be to make mortgage protection and health insurance more accessible.

And the withdrawal of lump sums out of defined benefit or ‘final salary’ pension schemes could create complications for scheme funding and forecasts. Those schemes in deficit could be hit especially badly, contributing to the closure of more final salary pensions.

Notes to Editors

1. The NAPF is the leading voice of workplace pensions in the UK. We speak for 1,200 pension schemes with some 15 million members and assets of around £800 billion. NAPF members also include over 400 businesses providing essential services to the pensions sector.

2. View the NAPF’s full consultation response here.

Contacts:

Paul Platt, Head of Media, NAPF, 020 7601 1717 or 07917 506 683, [email protected]

Christian Zarro, Press Officer, NAPF, 020 7601 1718 or 07825 171 446, [email protected]