Publications
Setting pensions free
| Authors: | Steve Webb |
| Date of Publication: | April 2009 |
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A new scheme, proposed today in a report from liberal think tank CentreForum, could stimulate the economy and rescue the housing market, all at negligible cost to the taxpayer, according to authors Steve Webb MP and Jo Holland. In their report, "Setting pensions free", Webb and Holland argue that the present rules which prevent individuals from drawing their tax free lump sum until they draw their pension should be relaxed.
Under the proposed scheme, lump sums built up to date could be used to clear mortgage arrears, to put down a deposit on a house, for a large capital purchase such as a new car or for any other purpose. With severe constraints on the ability of the Government to add further to government debt, this approach would provide a significant boost to the economy without adding further to government borrowing. Since around four fifths of people with pension funds already take a tax free lump sum when they draw their pension, early access to lump sums would not have a major effect on future levels of pension income.
The main features of the scheme are:
- anyone with a funded pension, including members of final salary pension schemes and funded public sector schemes, would be eligible
- the maximum amount that could be drawn down would be the lump sum accrued to date; there would also be a cap on withdrawals, which could be varied according to the state of the economy. With average mortgage arrears currently standing at around £5,500 on accounts in arrears, the authors suggest that a cap of £10,000 might be applied
- schemes would be able to charge a fee for withdrawals, and they could be limited to one withdrawal per scheme per year. To prevent tax avoidance, there might be a requirement that an individual would have to have been a member of their scheme for a minimum period, such as five years, before they could draw an early lump sum
Commenting, Steve Webb, Lib Dem Work and Pensions Spokesperson said:
"There is a real need for further stimulus for the economy, yet the government is limited in how much additional borrowing it can undertake. A far better solution would be to allow individuals to spend their own money that is currently tied up in their pension fund. It is crazy to be repossessing the houses of people who are perhaps £5,000 in arrears when they already have more than this as a lump sum in their pension fund which they cannot touch. Allowing individuals to access this cash could help existing homeowners prevent repossessions and help first-time buyers find cash for a deposit, both of which would support the housing market. Alternatively, individuals could use the cash for larger purchases such as new cars, which would give a boost to the ailing car market. The Chancellor should overcome the Treasury's natural caution and think creatively about how pension assets can be used to benefit individuals and the wider economy".
Welcoming the report, Lib Dem Shadow Chancellor, Vince Cable said:
“Steve Webb and Jo Holland address a very real problem: that many individuals have accumulated savings locked away in forms which cannot be realised even in dire financial circumstances. It seems perverse, for example, that when a family faces home repossession, and the loss of a house which would otherwise in old age provide security and asset value, it cannot gain access to tax free lump sum pension payments which are currently only available at designated retirement ages. Such rigidity is a feature of pension rules – compulsory annuitisation is another unhelpful restriction.
“I hope that my party will now be able to take forward these practical suggestions as part of a constructive approach to the real and escalating problem of those who face extreme liquidity problems, including the inability to maintain mortgage payments.”