When pensions are useless

I don’t know what proportion of people’s savings – and specifically of what they think of as their long-term savings – goes into pensions these days. But I strongly suspect that in the era of auto-enrolment and pensions freedoms, the proportion is high and growing.

This, I suspect similarly strongly, is one of the reasons for the astonishing and alarming lack of financial resilience shown by so many people during the current Covid-19 crisis. If they’re under 55 and their savings are in pensions, they can’t get at them – and so many seem to have no Plan B.

In the very short term, temporary interventions have largely hidden the scale of this problem. The government’s furlough scheme, along with low cost loans and repayment holidays on various forms of lending (including mortgages) have kept financial disaster at bay. But the reality is that these schemes will unwind later this year; unemployment will spike; and millions of workers in the gig economy will find their earnings much reduced. Especially for people who are heavily indebted, all this adds up to a gathering storm.

And, as I say, the one pot of money that many do have – their DC pension pot (or pots) – isn’t accessible until they reach age 55.

As the storm gathers, I can see one good thing coming out of it. I expect a growing realisation that our cliff-edge model of pensions and retirement fits less and less well with the way people actually lead their lives.   The fact is that as people get older and their financial commitments increase, disruptions to their income are likely to become more frequent, and to have increasingly serrious consequences – so the need for a fairly substantial savings lifejacket, to keep them afloat in the short to medium term, becomes greater and greater.

I worry about the mixed metaphors of storms, cliff-edges and lifejackets, but, ploughing on, I should say that of course many people do have just such a lifejacket available. There are billions of pounds – actually I think over a trillion – in personal savings and investments which are not locked away behind an age-limit restriction. But, that said, I’d be interested to know what proportion of this amount is held by people who are actually older than 55, and therefore unaffected by the access restrictions on pensions anyway. It’s people in their 40s and earlier 50s who are at the sharp end of this issue, and obviously the fact that they’re at or around Peak Outgoings is, in itself, the reason why they’re unlikely to be putting a lot away in non-pension savings.

Although I’m no expert in this sort of problem, I can dimly see the outline of a solution. I can imagine how pension pots could evolve into something like Lifetime Savings Accounts, where the money is accessible at any time but there’s still a tax advantage in leaving it till later life. If already in place, that kind of mechanism could come to the rescue of a great many LOBBLI – Lots Of Borrowing But Low Income – households over the next few years.

But obviously such a mechanism isn’t yet in place. And the first step towards creating it is recognising that the need for it exists.