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Early drawdown of a pension can give you access when you need it most

Policy makers have been reluctant to allow tax-free early access to pension pots

An aspect of the pensions system designed with people’s best interests in mind may act as a deterrent for some. The well-worn advice when it comes to pensions is to start savings early and keep going until your, hopefully, comfortable retirement. However, with competing priorities like home buying, children’s education, car purchase, and other lifestyle needs all vying for a share of people’s wallets in those crucial early years the idea of having a savings pot that you can’t touch for another 20 or 30 years may be quite unappealing.

One solution which has been proposed on several occasions over the years is to allow early drawdown of a portion of the pension pot in certain limited circumstances. Policy makers have resisted these calls for a variety of reasons, not least the fear of seeing people’s retirement incomes impaired due to ill-advised early drawdown.

There was one notable exception, however. Back in 2013, in the wake of the financial crash, the government allowed individuals who have added to their pension fund through additional voluntary contributions (AVCs) to have early access to that portion of the fund before they retire. People were allowed to withdraw up to 30 per cent of their AVC fund during a three-year period between 2013 and 2016. The fact that withdrawals were taxed at the full rate probably discouraged a lot of people and take-up was very low.

The limitation to the AVC portion of a fund also meant it applied to relatively few individuals and, even then, to a small portion of their overall pension pot.

The early drawdown proposals made since would apply to all pension savers and to the whole of their savings.

"It's about doing it while maintaining the integrity of the pension system," says Bank of Ireland head of pensions and investments Bernard Walsh. "Our view is that allowing some degree of flexibility around specified life events such as buying a home or paying college fees might be desirable. People can find it frustrating that just at the time when they most need the money, they find it is tied up until they are 65. And they can't borrow against it either."

There would need to be quite tight rules around it, however. “There would need to be guard rails governing things like maximum withdrawals, limiting them to a certain percentage of the fund, and requirements for a minimum balance to be left behind. Also, if you allow money to come out tax free you could offset that in future by lowering the tax-free lump sum. If you access €50,000 in 2021, for example, that would reduce the maximum tax-free lump sum from €200,000 to €150,000. There has to be a quid pro quo.”

According to Emmet Leahy, head of financial planning with Davy, there are precedents in other countries which could usefully be followed here. "I can definitely see the argument for anything to make pensions more attractive. That would be a big positive and house deposits are an extremely worthy potential use of any early access especially in today's climate. But I do wonder if housing is the big problem and not pensions. The trade-off is that it can't encourage excessive access which would leave less money available in retirement and exacerbate the problem further. That would be robbing Peter to pay Paul and lessening your chance of meeting your long-term needs. Pensions is already overly complex and that is one of the key reasons why there isn't more take up. If we add an extra layer to it, there is danger that it may complicate things still further."

In these circumstances, he believes a tax-efficient savings scheme like the UK’s Individual Savings Accounts may be a better solution to the problem. “Tax-efficient saving schemes like there are in other jurisdictions may help to fill the gap for shorter-term needs such as house deposits.”

Walsh believes any difficulties can be ironed out if there is a will to do it. “If the Government and the industry work together they can make sure that we don’t end up making the situation worse. Ideally, we would like a bit more flexibility to factor in life events. It might encourage more people to get into pension savings.”

Barry McCall

Barry McCall is a contributor to The Irish Times