Giving customers access to a small amount of their pension pot will prevent individuals opting-out and ease the decision of whether to lock up money into their pension or put it into savings so it is easily accessible, according to GlobalData Financial Services
The government-backed workplace pension scheme Nest has announced it is due to start a new trial, whereby a pension pot will be split into pension contributions and an ‘emergency fund’ that can be withdrawn at any time.
Nest is soon to run workshops with employers to discuss the project, and to find volunteers to participate in a trial.
The proposed new savings model has been labeled ‘Sidecar.’ This is because pension contributions will be split between a standard Nest pension pot, and a separate bank account or liquid fund for emergency spending.
The emergency fund will have a set threshold, and once it is reached all contributions will then be allocated towards pension savings. The saver can withdraw money from the emergency fund at any time. If they do so, contributions will then again be split between the pension pot and the emergency fund until it is full.
Nest is thinking about the customer. It has long been a hard decision for people whether they lock up money into their pension or put it into savings so it is easily
accessible. This model will provide the best of both worlds.
It is also a step towards preventing customers opting out. The introduction of auto-enrolment has meant that more individuals are contributing towards a pension.
This has been seen as a good step, helping people save for retirement which is something they know they should be doing.
However, minimum contributions for pensions are rising to 5% in April 2018 and further to 8% in April 2019, meaning individuals will be locking more of their money away into a pension.
This has the potential to cause consumers to opt out if they perceive increased contributions as unaffordable.
However, creating a model whereby a set amount of a pension pot is still accessible may help to prevent this.
Nest is promoting financial resilience for its customers. It is acknowledging that long-term saving is important for retirement, but so is having a fund to cover unexpected short-term costs. The question is how Nest will control emergency fund withdrawals so that access does not cause too much damage to the main goal of pension saving.
Nest should help to educate customers so they understand how much they will need to contribute over time in order to reach a suitable level of savings for retirement, and how any emergency fund withdrawals will impact this.
Financial resilience is increasing in importance for the industry. If trials are successful, other providers in the market may look to introduce a similar offering.