General Insurance Article - ACA calls for a truly flexible savings product

A particular concern for younger generations is the need to save separately for competing savings needs, such as for retirement and house purchases. For many this risks insufficient savings being directed in any individual savings area or for one area to crowd out resources for another, says the Association of Consulting Actuaries (ACA) in its response to the FCA Discussion paper on Intergenerational Differences (DP19/2).

 The ACA response challenges the notion that a typical Millennial might purchase a house in their early thirties and then “once they have managed to buy their first property, they might want to start accumulating some form of pensions wealth”.

 The ACA says that for many, this is unrealistic, and ”we believe hits the nub of the changing consumer needs as they go about building up their wealth”. The ACA response notes, for example:

 - under Automatic Enrolment, the majority of young people save for a pension from an early age and many will devote significant additional resources (above the minimum combined contribution level of 8% of earnings) in order to benefit from matching employer contributions;

 - under current legislation, house deposits (which have traditionally attracted significant initial savings focus for young people) must be saved for largely separately (as Lifetime ISAs cannot be used for automatic enrolment purposes); and

 - when looking to take out a mortgage, lenders often determine affordability by assessing net income. Pension contributions therefore compete with consumers' ability to borrow the amounts needed to get on the property ladder in many parts of the country.

 As a result, the ACA response says, ”we believe that meeting this new challenge requires the development of a truly flexible savings product that could facilitate both pension saving (with ability to benefit from tax relief and employer contributions) with the ability to also save to buy a house without incurring any penalty for withdrawing funds from the pension early.

 ”Given the overall responsibility that this product would place on individuals, we also believe that a robust advice and safeguarding framework would be required. However, this could be developed to be consistent with and proportionate to wider safeguarding frameworks at older ages around Freedom and Choice.“

 The ACA response notes that legislation, for example for auto-enrolment, favours saving for retirement over other forms of savings. Freedom and Choice has provided flexibility for those over age 55 who can divert their retirement savings to other purposes should they wish (many choose to pay off their mortgage with their pension fund, for example). Those under age 55 have no such flexibility (for example, to pay the deposit on a house).

 Unfortunately, it appears difficult for financial services firms to provide significantly more flexible savings products without new legislation. A flexible approach that allows financial services firms to design their own products satisfying general principles that Parliament feels are important (such as preventing frivolous use of savings that have received tax advantages) would allow much greater innovation.

 The full ACA response to the FCA Discussion Paper is available here.

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