Early access to pension savings: balancing competing financial challenges

We’ve talked a lot at NEST Insight about the importance of seeing retirement saving in the broader context of people’s finances. It’s easy for us as an industry to promote the benefits of ever higher contributions. But, especially for those on lower and moderate incomes, and those earlier in their working lives, it isn’t that simple. People face competing financial challenges, whether that’s larger ones, such as paying off student debts or saving for home ownership, or smaller ones such as having an income that varies from week-to-week or month-to-month.

Understanding these issues, and the potential solutions that could help people build up adequate retirement pots within a healthier overall financial position, is a key focus of our research. It’s why we’re trialling a workplace emergency savings account, often referred to as a ‘sidecar’. It’s why we’ve just published research exploring behavioural reactions to the first increase in minimum auto enrolment contributions, taking into account the impact on people’s broader financial lives. And, it’s why we’re planning further research into the interactions between pension saving, spending and debt.

The ‘workplace emergency savings’ concept is one way of using some of the tools that have helped people save for retirement, like payroll deduction, to also drive better outcomes in other aspects of personal finance. In this sense, you might see it as one of a ‘family’ of approaches that pension systems might take in the event that policy-makers choose to expand the goals of those systems beyond just retirement. Indeed, in an increasingly ‘DC’ world, where individuals contribute to and own their own defined contribution (DC) retirement account, pressure to effectively expand system goals in this way is common. This can be seen, for example, in the support for opening up pre-retirement access to funds within the UK’s DC system. Pre-retirement access to pensions, side-by-side accounts for different purposes, and a third option of allowing pension savings to be used to secure debt, are all different ways into this question. We’ve tended to argue that the ‘two accounts’ model is preferable, for a number of reasons, but all have their merits and challenges. I recently contributed to an article with Fiona Stewart and Himanshi Jain from the World Bank, exploring some of these issues: Early Access to Pension Savings: International Experience and Lessons Learnt.

Pension systems need to serve the retirement needs of savers, something which, as the article points out, many do not yet adequately do. But there’s also no point pretending that two individuals with the same DC pot can achieve an equivalent income, when one reaches retirement renting their home and carrying substantial personal debt, and the other has paid off their mortgage and is debt-free. Important questions remain around how we ensure that people can build up sufficient assets to meet a range of financial goals. Globally, the toolkit of auto enrolment, automatic deduction from payroll and, in many cases, auto-escalation have helped significantly increase participation in pension saving. Looking to pensions systems and pensions policy to help us to think about solutions to the broader challenges people face is a natural and sensible step. We’re exploring these issues in our own research, as are many others. If you’d like to know more, or are interested in working with us, please get in touch: insight@nestcorporation.org.uk

Will Sandbrook, Executive Director of NEST Insight