Workers could access emergency savings tied to their pensions

The savings would be linked to a pension but, unlike a retirement fund, could be accessed early to help in a financial emergency

Pension savers could get early access to their funds under plans being considered by the government.

Under the scheme, savings would be directly linked to a worker’s pension, and payments would be taken automatically from their salary.

But, unlike a retirement fund, the savings pot could be accessed early. This would allow pension savers to effectively draw down if they were faced with an emergency or support those on lower incomes to put aside more money without fearing they would not have access to it in a financial shock.

Under current rules you cannot take money out of your pension until you are 55, when you can access 25 per cent tax free.

The so-called “sidecar savings” plan will be looked at by a commission set up to find ways to boost the value of pensions, Work and Pensions Secretary Liz Kendall has said.

It comes amid warnings that workers are not saving enough for their retirement, and fears that the state pension triple lock – which sees pensions rise by the higher of inflation, wage growth or 2.5 per cent each year, is financially unsustainable in the long term.

Details of any policy that may eventually be signed off have not yet been decided – such as whether the savings would have an upper limit.

But Pensions Minister Torsten Bell previously suggested such accounts could be capped at around £1,000.

In his book, published before he was elected as an MP and working as head of the Resolution Foundation think tank, he said workers could be encouraged to save more into their pensions, but with some of the cash placed into an accessible account.

He suggested a portion of a person’s default pensions savings “should initially flow into this easily accessible account until the balance reaches £1,000, when it would roll over into your pension”.

This would help ensure people have some cash savings “so they can avoid taking on a high-cost debt or payday loans when a financial shock hits,” Bell added.

Government sources pointed to a recent trial carried out by Nest Insight offering employees a savings tool linked to their pension, which allowed them to set their own target.

Once this target was reached via automatic payroll payments, the surplus funds were transferred into their pensions.

The research found that the tool was popular among those with low financial security.

Sidecar savings – how do they work?

What is it?

A “sidecar” is a savings account that sits alongside your pension, but the money in the pot can be accessed at any time, rather than being locked away until retirement. 

The idea is that it would help someone who may be able to afford higher monthly pension contributions – but is unwilling to make that commitment in case they need the money in the meantime – to be able to set savings aside but still access them should they need. 

How would it work?

There are different proposals for how a “sidecar savings” account could work.

The “two account” model would allow someone with a workplace pension to set up a separate account with a savings provider and set a cap on this.

The bank or savings provider would then ask the employer of the person to make payments into the “sidecar” until the cap is reached, and then any surplus savings are moved into the pension. 

Another option – the in-plan sidecar – would see both the employee and employer agreeing to make payments into the sidecar.

So it would essentially be rolled into normal pension contributions – albeit likely at a higher rate – and the pension provider divides the contribution between the pension account and the sidecar.

In both of these models, the money in the sidecar can be accessed at any time by the saver.

The salary deductions would then restart into the savings tool until the target is reached again.

In a trial, which was carried out by Nest Insight and ran for four years, pension tax relief was only applied to money actually going into the pension and not the sidecar.

It found the median amount saved over 12 months was £384, and median monthly additional pension contributions amounted to £100.

Personal finance experts suggested that the savings plan could be introduced under an “opt out” scheme – to boost savings for as many people as possible.

Data shows 7.6 million people “have low savings and little capacity to deal with financial shocks”, Tom Selby, Director of Public Policy at AJ Bell, told The i Paper.

“Leveraging the automatic enrolment structure to help people build short-term savings could be an effective way to help millions of people get themselves in a stronger financial position,” he added.

Mr Selby said he would expect the tool to be open to all employers via the existing auto-enrolment pension system, with “low earners” the “obvious beneficiaries”.

Former pensions minister Steve Webb – now a partner at LCP consultancy – said the policy would be of most help for those on lower incomes who cannot afford to lock their savings out of reach.

“This would probably be integrated into automatic enrolment, which is currently focused on those aged 22 to state pension age,” he said.

“It’s possible that this could somehow be linked with funds for a house deposit, in which case the focus might be on younger people, but there’s no indication at the moment that this is what they are looking at.”

A Conservative Party source welcomed the policy but argued its benefits could be outweighed by any tax changes that could disincentivise saving.

Shadow Work and Pensions Secretary Helen Whatley told The i Paper that she supported “policies to encourage people to save more, particularly self-employed people”.

“But this Labour Government is busy clobbering hardworking people with taxes, and we hear more damaging tax rises are coming in the autumn,” she added.

Speaking on Monday, Kendall said the Commission would “propose ways to broaden access and tackle inequalities in pension saving” with a focus on young people, low earners, and the self-employed.

This includes considering “innovative solutions like sidecar savings, where people save for their pension alongside an accessible liquid savings account,” she added.