Personal pensions could be answer to Britainís payday loan problems, says Hargreaves Lansdown
British savers should be entitled to access and utilise the funds from their personal pension pots before they reach the retirement age in financial emergencies rather than being forced to turn to high-interest payday loan companies to cover their expenses, a leading pension authority has argued.
Prominent investment firm Hargreaves Lansdown conducted a study into the short-term financial assistance facilities available to consumers across the UK, and concluded that there is currently an inadequate number of ways to access short-term funding in the country; a reality which is leaving people with no choice but to apply to the high-interest payday industry.
Hargreaves Lansdownís calls for an improvement in the countryís short term finance capabilities is likely a direct response to a recent survey undertaken by the Competition and Markets Authority, which sought to identify the primary reasons behind consumer usage of payday loans. The study report concluded that over 50% of borrowers utilised the short-term finance mediums in order to address a sudden and unplanned rise in their monthly expenses; an occurrence which has most likely been substantiated by a recent tightening of lending criteria by the Financial Conduct Authority and the reluctance of mainstream providers to distribute short-term finance to anyone without an exemplary credit rating since the start of the recession.
The payday market has expanded rapidly in the past few years, with a staggering 10 million loans thought to have been distributed to struggling individuals in Britain during 2012, at an average value of £260. However, companies within the industry have frequently been the topic of controversy and criticism, as politicians, clergy and consumer groups alike have continually voiced their discontent at the high interest rates, excessive default charges, minimal finance checks and telephone harassment payday firms apply to their service.
The collective result of these different aspects within UKís financial landscape has been that consumers who have fallen upon financial uncertainty have had little choice but to turn to more dangerous lenders such as payday and logbook loan firms to cover their immediate expenses, and have subsequently seen their situation worsen as interest charges exceeding 2000% APR send the value of their debt rising even further.
ëHuge step forwardsí
Hargreaves Lansdown have argued that by granting all householdís the right to access hundreds of pounds worth of monetary reserves, the overall financial stability of the country will improve as people will be able to use their own provisions, on their own terms, to cover short term expense gaps, rather than utilise high interest payday loans which could rise to an unattainable level to repay.
The logistics of implementing this measure in reality has been made more viable in recent times following the introduction and success of numerous staff auto-enrolment pension schemes across the country. The widespread use of these schemes has meant that most households involved can acquire a sufficient level of emergency cash within their pension pots in just a couple of years, whilst the impact of accessing these funds should be minimal due to the long-term scope of such pension programmes.
The investment giants also argued that in order to minimise the potential risk of savers throwing away their entire pension pot during one occasion financial difficulty, a condition should be inserted into its access which necessitates that individuals participate in a consultation with the Money Advice Service or The Pensions Advice Service before they are able to take any cash out. They also suggested that individuals should only be able to make a single withdrawal in a short space of time and should then be required to put more money into their account over a series of years before being authorised to do so again.
The key proposals suggested by Hargreaves Lansdown included:
ï Employer payments to a member of staffs pension pot being paid into a cash account for a short period (such as one year), before then being reallocated to their pension account.
ï Alternatively, pension suppliers could allow account holders to loan money from their own pension pots, and pay the cash back when they are in a stronger financial position to do so.
ï The introduction of tax relief reform in the UK which would see all reductions granted to an individual by the government being placed into a cash account for a short period, before being reallocated to their pension pots.
Each of the proposals would enable both staff members and their employers to retain the same level of pension contributions each month, though statistical analysis has suggested that diverting pension payments each month to a cash account would grant an individual earning £40,000 a year emergency finance facilities totalling nearly £2,500.
Tom McPhail, head of pensions at Hargreaves Lansdown, believes the introduction of emergency pension pot facilities would significantly bolster the countryís ëfinancial resilienceí and argued that its introduction could be facilitated with ëminimal disruption to the pensions systemí.
"Given the success of auto-enrolment and the low opt-out rates, we believe now is the right moment to look at how the pensions industry can help to solve a financial challenge which is particularly relevant to lower-income households," said Tom McPhail, head of pensions research at Hargreaves Lansdown.
"For many people, simply having a cash reserve of a few hundred pounds to draw on in an emergency would be a huge step forwards in strengthening the country's financial resilience. It could be achieved at no extra cost to the savers, and with minimal disruption to the pensions system."