So-called “sidecar savings” will be looked at by a commission set up to find ways to boost the value of pensions, Work and Pensions Secretary Liz Kendall has said.
But, unlike a retirement fund, the savings pot could be accessed early to help in a emergency and would support those on lower incomes to put aside more money without fearing they would not have access to it in a financial shock.
But Pensions Minister Torsten Bell previously suggested such accounts could be capped at around £1,000.
He suggested a portion of a person’s default pensions savings “should initially flow into this easily accessible account until the balance reaches £1,000, when it would roll over into your pension”.
Government sources pointed to a recent trial carried out by Nest Insight offering employees a savings tool linked to their pension which allowed them to set their own target.
The research found that the tool was popular among those with low financial security.
Sidecar savings – how do they work?
What is it?
A ‘sidecar’ is a savings account that sits alongside your pension but the money in the pot can be accessed at any time, rather than being locked away until retirement.
The idea is that it would help someone who may be able to afford higher monthly pension contributions – but is unwilling to make that commitment in case they need the money in the meantime – to be able to set savings aside but still access them should they need.
How would it work?
There are different proposals for how a ‘sidecar savings’ account could work.
The “two account” model would allow someone with a workplace pension to set up a separate account with a savings provider and set a cap on this.
The bank or savings provider would then ask the employer of the person to make payments into the ‘sidecar’ until the cap is reached, and then any surplus savings are moved into the pension.
Another option – the in plan sidecar – would see both the employee and employer agreeing to make payments into the sidecar.
So it would essentially be rolled into normal pension contributions – albeit likely at a higher rate – and the pension provider divides the contribution between the pension account and the sidecar.
In both of these models, the money in the sidecar can be accessed at any time by the saver.
The salary deductions would then restart into the savings tool until the target is reached again.
In a trial, which was carried out by Nest Insight and ran for four years, pension tax relief was only applied to money actually going into the pension and not the sidecar.
Personal finance experts suggested that the savings plan could be introduced under an “opt out” scheme – to boost savings for as many people as possible.
“Leveraging the automatic enrolment structure to help people build short-term savings could be an effective way to help millions of people get themselves in a stronger financial position,” he added.
Former pensions minister Steve Webb – now a partner at LCP consultancy – said the policy would be of most help for those on lower incomes who cannot afford to lock their savings out of reach.
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“It’s possible that this could somehow be linked with funds for a house deposit, in which case the focus might be on younger people, but there’s no indication at the moment that this is what they are looking at.”
Shadow Work and Pensions Secretary Helen Whatley told The i Paper said she supported “policies to encourage people to save more, particularly self-employed people”.
Speaking on Monday, Kendall said the Commission would “propose ways to broaden access and tackle inequalities in pension saving” with a focus on young people, low earners and the self-employed.
This includes considering “innovative solutions like sidecar savings, where people save for their pension alongside an accessible liquid savings account,” she added.
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