Early access in times of financial hardship
Even if an opt-out emergency savings vehicle is introduced in the next decade, these savings
are unlikely to be enough to cope with some specific circumstances of financial hardship.
Our members frequently receive calls from customers who are desperate to access money
from their pension savings as they face acute financial hardship. Examples have included
attempting to access money to pay for critical overseas medical care for themselves or a
loved one, and trying to avoid losing their home to mortgage foreclosure. The Treasury
consulted on early access in 2010
, but decided not to move forward due to limited evidence
suggesting it would have a positive impact and the extensive reforms already underway,
including AE. Although not the intention of a pension product, there are extreme cases where
the use of these funds could be life-changing for their owners. It could also make pensions a
more attractive investment vehicle to people who may want or need flexibility. It may also
encourage people to increase contributions, easing the fear of money being locked away.
This is particularly the case for self-employed people.
Financial hardship is not currently recognised as a legitimate reason for accessing a pension
before the age of 55. It is therefore deemed an unauthorised payment and typically results in
a 55% tax charge from Her Majesty's Revenue and Customs (HMRC); most pension providers
do not allow unauthorised access for this reason. People determined to access their pension
savings are left with the option of transferring to an unregulated provider, putting them at a
greater risk of being scammed.
There are, of course, challenges to achieving these objectives. In the course of this work, we
have engaged with counterparts in many international territories which allow early access
and experiences have been mixed. A consistent definition of financial hardship in tax
legislation would be critical, as well as clear guidance on what, if any, evidence people would
have to present of financial hardship so they can access pension funds. Rules governing
access would need to specify the periodicity, frequency and value allowed to be taken, and
in what circumstances. Options could include a total that can be accessed per year, a capped
percentage for each individual pot or a triggering event with implications on future tax relief
similar to the rules around Money Purchase Annual Allowance.
Further consideration would need to be given to the consequences of early access, including
eligibility for means-tested benefits, and its impact on bankruptcy protection. Rules on
recycling would also need to be reviewed to ensure customers are not reinvesting the money
taken out and benefiting from tax relief again. Finally, communications would need to be