Younger generations could be encouraged to save more for the long-term if the state allowed them to dip into their retirement savings early in order to cover urgent essential expenditure.

This is according to evidence submitted by the Association of Consulting Actuaries for a Treasury Select Committee inquiry examining whether the current suite of tax reliefs represent good value for money.

The ACA said too many people currently do not have a cushion of adequate immediate-access savings that would cover unexpected costs.

With competing savings needed for housing and student loans, the ACA believes there is a risk recent negative economic shocks, such as the pandemic and current high inflation, will “undo” the work of policy developments such as automatic enrolment.

It makes it harder to persuade people to lock away significant savings until retirement, it said, if much of the UK population lacks savings to cover unexpected costs – from a broken-down boiler or car, through to unexpected redundancy and not having wages for a period until they find a new job.

The ACA cited countries such as Australia and New Zealand, where younger generations can already gain early access to retirement savings through various products. Currently people in the UK cannot access their pensions until age 55.

“One option would be to allow more flexibility for people to dip into retirement savings before retirement to meet urgent essential expenditure,” the association said in its evidence.

It added that allowing individuals to access their retirement funds early is also consistent with the ‘freedom and choice’ rules which were first introduced in April 2015, giving people more flexibility as to when and how they access their defined contribution pension savings.

An ACA survey last year found 73 per cent of respondents believed aggregate savings would increase if there was greater flexibility.

‘Insufficient’ govt resources
The ACA’s evidence also looked at pension tax relief more generally, and potential improvements to it.

Pension tax relief cost HM Treasury £42.7bn in 2020-21. The ACA said this tax relief has been good value for money, that occupational pensions provide more income than the state pension on average, and that the uptake of private pension income has been rising.

Some 74 per cent of pensioners received a portion of this income in 2021, more than previous years.

But there is still too much complexity, it added.

While the ACA said a “degree of complexity is inevitable”, it also said there were “insufficient government resources” devoted to developing and maintaining the rules around pension schemes and pension tax relief.

“Rules are also poorly understood by the general public, and this also possibly dilutes the positive overall impact on incentives to save into pensions,” the ACA said.

“Going forward, we would prefer quality over quantity of legislation, even if it meant that legislation was slightly slower in arriving on the statute books, and we would prefer to see more resources devoted to creating and maintaining high quality tax laws.”

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