London, England – A leading think tank has called for Britain to adopt a more flexible pension system similar to that of the United States. The Resolution Foundation think tank, in partnership with the abrdn Financial Fairness Trust, released a report proposing that individuals should have the ability to access their pension pots at any time to deal with unexpected financial challenges. Currently, individuals who access their pension before the age of 55 will incur a tax charge of up to 55%, unless they are terminally ill. This has led to limitations for those facing significant income shocks, as access to long-term savings comes with a heavy price.
According to the report, the UK’s pension system is considered unusually strict in comparison to other countries. The think tank recommended that individuals be allowed to borrow from their pension pots, with conditions for repayment, in order to mitigate financial hardships. This proposed change is believed to offer greater financial flexibility for workers, particularly given that one in three working age families in the UK have less than £1,000 in “rainy day” savings. Additionally, around 13 million people in the UK are not saving enough to meet the minimum target for an adequate retirement income.
Former pensions minister and partner at consultancy LCP, Steve Webb, emphasized the need for both long-term and short-term savings in one product. He also voiced support for gradually increasing auto-enrolment contributions from 8% to 12%, with a portion of it allocated towards an easy access “sidecar savings” scheme of up to £1,000. The report aims to improve families’ financial resilience throughout their working lives and into retirement.
The proposed reforms align with existing practices in other countries such as the US, Australia, New Zealand, South Africa, and Canada, where pension pots can be withdrawn in cases of financial hardship. In the US, savers can access their employer-sponsored retirement plan at any time, although they are subject to taxes on the withdrawn money and a 10% penalty. Additionally, most individuals can take a loan of up to 50% of their savings, up to a maximum of £39,000 ($50,000), as long as the amount is repaid.
Another notable practice in some countries is allowing savers to use their pensions to purchase their first home, as seen in New Zealand where substantial amounts were withdrawn for hardship claims and first-time home purchases. Experts argue that this use of pension money can prevent individuals from needing to fund rent in retirement.
The proposed changes to the pension system in the UK have sparked discussions about the balance between long-term savings and the need for immediate financial support. The potential for increased financial flexibility and resilience among families has been met with both support and scrutiny. Observers are eager to see how these proposed reforms can address the challenges faced by workers and retirees in the UK’s current pension system.