Savers should be allowed to access their pensions before retirement in an emergency as an alternative to payday loans, a pensions expert has suggested.
The payday loan industry has boomed in recent years, and in 2012 more than 10m loans were taken out, each worth an average of £260. Interest on borrowing can be steep, with big names such as Wonga charging annual rates of several thousand per cent, and debt charities reporting that in some cases loans have quickly grown to unmanageable sums.
A survey by the Competition and Markets Authority found that half of borrowers had used the loan to cover an unexpected increase in expenses or outgoings.
With millions of workers now being enrolled automatically into pensions by their employers, the firm said there was potential to allow them to build a cash reserve over as little as two years, which could be drawn on if necessary.
The impact on their retirement provision would be minimal and, depending on how the scheme was structured, could reduce the eventual pension payout by as little as 2%.
To stop the money being frittered away, the firm suggests that savers would have to consult with the
In a paper on the subject,
• Employer contributions over a limited period (eg two years) could be channelled into a cash account, before being redirected once again into pension saving.
• Government tax relief on the member's contribution could be diverted into a cash account for a limited period (eg four years), before being redirected once again into a pension.
• Rather than creating a separate cash account, the pension provider could simply offer investors an alternative loan option, lending out a capped sum from their pension pot.
Under each system, the government, employers and employees would all maintain their existing contribution levels. Under the first two, employees would need to opt in to the scheme to have the money set aside in the early years, but in the third there would be no need to sign up in advance.
For someone earning £20,000 a year, redirecting employers' contributions into an account for two years would create an emergency fund of £1,225, while collecting the tax payments for four years would provide a fund of £833.
"Given the success of auto-enrolment and the low opt-out rates, we believe now is the right moment to look at how the pensions industry can help to solve a financial challenge which is particularly relevant to lower-income households," said
"For many people, simply having a cash reserve of a few hundred pounds to draw on in an emergency would be a huge step forwards in strengthening the country's financial resilience. It could be achieved at no extra cost to the savers, and with minimal disruption to the pensions system."
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