Thoughts on the early opening of pension pots in the 2013 Budget


[From your perspective] Allowing members of the public to access pension savings is a step in the right direction. It is the “Additional Voluntary Contributions” part of the pension pot which will become accessible. 30% of it’s value may be withdrawn (and then taxed).
If an employer requires that an employee contribute 5% of their income to a company pension plan, then it is the excess over this which an employee may have voluntarily put aside for their retirement that will be accessible.
It is perhaps unsurprising that a pension product so beloved by the civil service is the one which has become accessible.
People who are self-employed cannot have an Additional Voluntary Contribution pension pot.
There are two types of people who can use such a scheme. Those in possession of an Additional Voluntary Contribution pension pot and who are still in employment, and those who are no longer still in employment.
For the first set of people, they are likely to be unable to use these released monies as an investment to increase their income in the short to medium term (as they are employees) so it is likely that should they choose to use such a scheme, they will use the scheme to de-leverage (pay down debts).

Used wisely, this should allow them to increase their disposable income, at the cost of their long term earnings. This is not an unreasonable position for some to take, as the purpose of a pension is to reduce income variance across time. If they realise now that they are not as rich as they thought that they were going to be, then an inter-temporal transfer could be wise (particularly if they are paying down expensive debt).

As these people are currently in employment then the monies recouped are likely to be taxed at the effective marginal rate 41% income tax + 6.6% Pay Related Social Insurance + 7% Universal Social Charge.
For an employed person, 54.6% of monies withdrawn from an Additional Voluntary Contribution pension pot will be transferred to the Exchequer in recouped taxes.
The other set of people who may access such a pot are people who are now unemployed, and have previously paid into an Additional Voluntary Contribution pension pot.

For these it’ll make a lot more sense as they will be operating off a primary income of nil so they can probably withdraw enough to have a small basic wage for a year or two without incurring too much of a tax liability.

For former employees hoping to be entrepreneurial this may be of benefit.

There may be a missed opportunity in not also including the self-employed in this scheme. De-leveraging (for those with incomes) may  have some benefit for wider economy if those who  use it pay down expensive debt and then spend their increased disposable income.

As the Government seems to be engaging in financial repression (by increasing taxes on savings – increased Deposit Interest Retention Tax – Applying Pay Related Social Insurance to Deposits, along with last years Universal Social Charge) this might force people to spend in the present, rather than save for future rainy days.

However looking to the past suggests that people would rather fill their mattresses with cash instead.
For those without an income (including those who were self-employed) who are looking for capital for a fresh start, then this scheme could be very useful.

If however you are a deeply indebted person, then the fear is that the banks will simply use your pension pot as an extra asset to squeeze on the path towards bankruptcy.

Such capital would be used to pay down foreign debt (of the banks) the individuals long term income will decline, while short-medium income will remain unchanged, thus there is no net benefit to the economy (or even the exchequer, as someone on that path will probably only pay Universal Social Charge on the sum they redeem from their pension pot).

This seems to be the reason why the scheme is not being extended further.


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