There have been calls recently for the government to consider changes to auto-enrolment that would introduce a ‘sidecar’ savings mechanism to encourage workers to build up emergency funds.

The idea is employees could voluntarily increase their monthly contributions but have savings held in a separate account until they reached a certain level and were transferred to the pension pot. Nest has been running a trial version of this scheme for a while.

It is always great to make pension saving more flexible and to encourage more people to build up emergency reserves, but the idea of a separate pot running alongside a pension is a rather clumsy way of achieving this. It would be far easier to implement and understand if the government made a simple, but fundamental, change to pensions legislation.

LEBC welcomes sidecar savings proposal, pushes for wider reform

It should consider allowing all voluntary contributions made into all pension schemes above the minimum auto-enrolment levels to be freely withdrawn within the first, say, two years of investment. This would mean anyone saving above the minimum auto-enrolment levels would always have emergency funds available.

Flexibility

Such flexibility around access would also make it easier for people to commit to higher levels of pension saving in the first place, and ought to encourage greater levels over the long term.

All monies deferred from income and put aside should continue to be made tax free, but anything withdrawn would be subject to income tax.

That should also allow for an effective higher rate of return on any such savings, without people having to set up additional schemes and without employers having to implement complex arrangements to pay pension money into one pot and voluntary savings into another.

Early retirement: Do clients have a back-up plan?

This simple change to legislation would give millions of workers instant access to emergency funds while saving millions of employers from having to make changes to pension or payroll arrangements.

Yes, it would make pension schemes harder to administer, but that’s a small price to pay for the increased interest generated in additional pension saving.

Steve Bee is director of Work Life Benefits

This article featured in the June 2021 edition of MM. 

If you would like to subscribe to the new monthly magazine, please click here.