Should People Be Allowed to ‘Borrow’ from Their Pension Pots? The Resolution Foundation Thinks So

The Resolution Foundation has put forth a proposal advocating for the ability of individuals to access their pension funds as a means of managing financial challenges prior to retirement. The Foundation has identified a £74 billion savings gap in Britain and has suggested the implementation of a “sidecar savings” scheme in conjunction with workplace pensions to tackle this issue.

The proposed amendments would permit savers to borrow the lesser of £15,000 or 20 percent of their pension fund’s value in order to address pre-retirement financial pressures. These loans would subsequently be repaid through augmented contributions directly into their pension funds at a later stage. This adaptable approach has already proven to be successful in the United States.

The Precautionary Tales report, conducted in collaboration with the abrdn Financial Fairness Trust, has revealed that approximately one in three working families do not possess a basic rainy day savings fund of at least £1,000. Families with limited savings are more likely to rely on credit cards, overdrafts, or borrowed funds for day-to-day expenses.

A recent report suggests that individuals in the UK should consider a 12 percent contribution into an accessible “sidecar savings” scheme of up to £1,000, with supplementary contributions directed towards a pension fund. This proposition aims to increase the number of families with emergency funds while simultaneously bolstering retirement incomes.

Molly Broome, an economist at the Resolution Foundation, has underscored the triple savings challenge faced by families throughout Britain, including insufficient savings for unforeseen expenses, major life events, and retirement income. To tackle this challenge, she advocates for the expansion of the successful pensions auto-enrolment program to encompass more individuals in both accessible and long-term savings.

Mubin Haq, CEO of the abrdn Financial Fairness Trust, has voiced concerns regarding the lack of savings in Britain and the necessity for increased contributions to alleviate hardship in retirement. He believes that pensions auto-enrolment presents a significant opportunity to establish a safety net for those currently without one.

In response, a spokesperson from the Department for Work and Pensions has highlighted the success of automatic enrollment in aiding nearly 11 million people in saving for their futures, with a total of £116 billion accrued in 2022. They have also mentioned targeted support for low earners through the Help to Save Scheme and the Government’s Midlife MOT program, both of which are designed to assist individuals in retirement planning.