Should the pension rules change to support hardship?

The current state of the global economy and rapidly rising inflation in the UK means that many savers are experiencing a period of financial hardship.

While some of us may be able to rely on savings or investments, there have been growing calls to change the rules around the taxation of pensions to allow individuals to dip into their pots if they are experiencing financial difficulties.

The Association of British Insurers, the trade body for the pension industry, recently appealed to the Government to change the tax rules relating to pensions to allow those facing acute financial hardship to withdraw money without being penalised.

While those over the age of 55 can make tax-free withdrawals from their pension thanks to the pension freedoms, those who are younger cannot as financial hardship is not currently recognised as a legitimate reason for accessing a pension early.

As a result, when a person under the age of 55 takes money from their pension pot it counts as an unauthorised payment resulting in a 55 per cent tax charge.

In its appeal for change, the ABI points to Canada and Australia, two nations that allow tax-free early access to pension savings in the event of disability, terminal illness or severe financial hardship.

While allowing savers to access their savings early puts their later life savings at risk and may prevent access to certain benefits, it could help alleviate the financial strain of the cost-of-living crisis.

The ABI said: “Given the potential benefit of introducing such a policy, and the challenges that would need to be weighed up and worked through, we recommend the Government launch a green paper looking at whether people should be able to access their pension savings before the normal minimum pension age if they face significant financial hardship that reasonably outweighs any loss to their future retirement income.”