Fast forward: What will pensions be like in 20 years? Experts say taking a loan and easy access are on the cards, while inheritance may mean losing the state pension
The nation's plans for old age have been subject to change lately as the chancellor has announced a range of reforms to how pensions work. There have been radical changes, and everyone believes more are heading our way. So what will pensions saving be like in 20 years’ time?
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EASY ACCESS PENSIONS
Pension savings have historically been sacrosanct. Any money put into a scheme was not to be touched until age 55. But the door has been opened for pension pots to one day be more like regular savings accounts or Isas, some say.
The announcement of the soon-to-be-launched Lifetime Isa was a step in this direction. Savers can put money in and receive a top-up from the government, and while they’re free to take money out (as with a regular Isa), there will be charges to pay for anyone dipping into it before the age of 60 unless used by a first-time buyer to purchase a home.
“That’s the direction of travel, towards Isa-style pensions,” says Murray Smith of Mattioli Woods.
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It plays into the human preference for gratification today, but can mean people depleting their savings which are meant to protect them when they’re at their most vulnerable, in old age. “Although this behaviour may seem profligate, it is perfectly natural and is called ‘hyperbolic discounting’, where humans naturally show a preference for jam today rather than jam tomorrow,” says John Lawson from Aviva.
“Setting a minimum age at which retirement savings can be taken acts as a sensible brake against nature.”
TAKE A LOAN FROM YOUR PENSION
In the US, people can borrow up to 50 per cent of their pension, known as a 401k. The loan must be paid back, or else there are tax penalties.
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This could be widespread in the UK one day. “In future there will be far more reliance on people’s own savings and they will have to save more. But to ask people to lock up money without any access to it is increasingly unrealistic,” says Richard Parkin of Fidelity Worldwide Investment.
Lawson says the experience in the US shows younger generations are more prone to take a loan from their pension. Those who take loans are also more likely to take a second one.
The upshot of allowing savers to borrow from their pension may be that more people are encouraged to pay into one. But the loan side of the pension would have to be subject to strict limits and penalties, to avoid people sapping all their savings.
“While loans are very popular they are not necessarily good for the consumer,” Parkin adds.
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INHERITANCE MEANS LOSING STATE PENSION
In Australia, the state pension is means-tested. We could be going that way too in the next several decades. “I’ve been saying for years that when my generation gets to retirement, the state pension will be means-tested,” says David Goodfellow of Canaccord Genuity.
A tell-tale sign is in the recent change which allowed people to pass on their pension assets to children tax-free.
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“It may be that if you inherit a pension you won’t be getting a state pension,” says Woods. “Why else would the Treasury allow pensions to be passed down tax free, when they normally get a chunk of tax on it?”
However, if this is introduced, it will probably be quite far in the future. “This is most definitely not a vote winner, particularly for political parties that regard the well-off as their core voters. So, expect means testing of pensions to be considered as a last resort,” adds Lawson.