UK pensions should be transitioned to a more flexible US-style system, a leading think tank has recommended.
The Resolution Foundation has suggested savers should be able to access their pension pots at anytime to deal with financial issues, such as the cost of living crisis.
Britons accessing their retirement savings before the age of 55, unless they are terminally ill, are hit with a tax charge of up to 55 per cent.
In its report, which was released in abrdn Financial Fairness Trust, the think tank warned that households facing an income shock will be unable to rely on their savings without paying a hefty fine.
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Britons under 55 are slapped with a hefty tax bill for accessing their pension pot early
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According to the Resolution Foundation, the current system in the UK is “unusually” strict and the Government should consider more flexible rules which are common in other countries, such as the US.
The report authors wrote: “To help families cushion large, infrequent shocks, we propose that people should be allowed to borrow the lesser of £15,000 or 20 per cent of their pension pot value, on condition of mandatory earnings-contingent repayment to their own retirement fund, with interest to reflect the forgone growth.”
Furthermore, the think tank’s report called for auto-enrolment contributions to be gradually raised from eight per cent to 12 per cent.
Some two per cent of this hike should go towards an easy access “sidecar savings” scheme of up to £1,000, according to the Resolution Foundation’s economists and researchers.
There would be no restrictions on this amount’s use and any balance higher than £1,000 would be rolled over into an employee’s retirement savings which would begin to attract tax relief.
Many other countries, such as the US, Australia and Canada, permit savers to make withdrawals from their pension pots if they are dealing with a financial shock.
Savers in America are able to access their employer-sponsored retirement plan at any given time, however, tax is paid on any cash taken out alongside a 10 per cent penalty.
The majority of US savers are able to take a loan of up to 50 per cent on their savings as long as the money is repaid. This is the equivalent of £39,000.
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Economists are calling for reform of the current pension system to one that resembles the US more
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A spokesman for the Department for Work and Pensions said: “Automatic Enrolment has already helped nearly 11 million people save for their futures, with £116billion saved in 2022.
“Also the number of eligible private sector low earners now saving for a pension has risen from 17 per cent in 2012 to approaching 80 per cent today.
“And to help those on the lowest incomes save, we offer targeted support including through our Help to Save Scheme which offers a 50 per cent bonus on monthly deposits of up to £50 and saw use increase by over a quarter in the last year alone.
“We also encourage people to take advantage of the Government’s Midlife MOT offer, which helps them take stock of their finances and plan for retirement.”