People like access to their money – you only have to look at the overwhelmingly positive reception given the Chancellor’s revolutionary new pension withdrawal rules to see that. So now that the over 55s can access as much of their pension whenever they want, maybe it is time to extend at least some of that flexibility to younger savers.
The new rules around drawing pensions – that means millions can take their cash rather than buy poor value annuities – have transformed perceptions of pensions overnight. When Steve Webb, the pensions minister said he would not mind if people used their pots to buy a Lamborghini, he sparked the retirement dreams of thousands.
Most younger savers are, like their older colleagues, too level-headed to want to blow the lot on a fast car. For millions of employees in their twenties, thirties and even forties, the possibility of using their pot to help fund for a deposit for a home would be far more attractive.
Allowing early access to at least a portion of pension assets for specific purposes, such as a deposit for the purchase of a home or to help through periods of serious financial hardship would do for the under 55s what the Budget pension changes have done for the over 55s – forge a meaningful connection between the individual and their long-term saving.
For most young people, this connection with their pension simply isn’t there at the moment.
It is a problem the pensions industry has faced for years – put simply, retirement is so far away, and there are so many other priorities young people will encounter before they get there that it is always an uphill struggle getting them to engage with their pension saving.
Behavioural psychologists have a term for the problem – ‘hyperbolic discounting’, which is the hard-wired tendency for human beings to place a greater value on a thing they will enjoy in the near future than one they will enjoy in the distant future.
Because young people have so much longer to go until they retire than those in their fifties, the effect of hyperbolic discounting is that much greater – meaning there is arguably an even greater need to offer them access to their pensions than older savers.
And the fact that younger people will be less reliant on defined benefit pensions and will access state pension at later ages, only adds weight to the arguments for making pensions more appealing to them.
It could be argued that auto enrolment has been designed specifically to get over this lack of engagement. But if young adults cannot be incentivised to pay in more than the minimum required by auto enrolment, they will not achieve the retirement income they are expecting.
You may think that letting young people dip into their pension pot means they will have nothing left when they come to retire. But there are examples of the system working well – and if people don’t feel their money is trapped, they can be encouraged to put more in.
In New Zealand, the government’s popular KiwiSaver workplace pension saving programme allows savers to make withdrawals to help fund a deposit for their first home or if they are seriously ill or suffering significant financial hardship. And in Cyprus, savers in the country’s Provident Funds can, in certain circumstances, apply for loans from their pension fund.
By allowing access to a certain proportion of a pension pot for home purchase the Chancellor could engage Generation Y with pensions at the stroke of a pen.
At NOW: Pensions we believe giving young people the opportunity to get a foot on the property ladder through their pension is an idea well worth considering. Why should the over-55s be the only ones in love with their pensions?