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Pensions: Access to pots 'could cut use of payday loans'

August 6, 2014

Hilary Osborne

Savers should be allowed to access their pensions before retirement in a financial emergency that would otherwise result in them turning to payday lenders, a pensions expert has suggested.

Investment firm Hargreaves Lansdown said offering households a cash reserve of a few hundred pounds would mean they wouldn't have to rely on short-term borrowing to fund unexpected expenses.

With millions of workers now being enrolled automatically into pensions by employers, the firm said there was potential to allow them to build a cash reserve over as little as two years.

The payday loan industry has boomed in recent years, and in 2012 more than 10m loans were taken out, each worth an average of pounds 260. Interest on borrowing can be steep, and debt charities report that in some cases loans have quickly grown to unmanageable sums.

A survey by the Competition and Markets Authority found that half of payday loan borrowers had used them to cover an unexpected rise in expenses.

Hargreaves Lansdown said the effect of its proposal on retirement provision would be minimal and, depending on how the scheme was structured, could reduce the pension payout by as little as 2%. To stop the money being frittered away, savers would have to consult advisers before being allowed to withdraw cash and only be allowed to withdraw more money after several years of paying into their retirement fund.

The scheme could channel an employer's contributions into a cash account for a limited period, such as two years, before the money is redirected into pension savings.

Alternatively the tax relief on saver's contributions could be diverted into an account for four years. In a third option, the pension provider could lend out a capped sum from the pension pot. Hilary Osborne

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Source: Guardian (UK)

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