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The Treasury is to launch an inquiry into whether pension savers should be allowed to dip into their retirement funds without tax penalties well before they are ready to stop working.

The Liberal Democrats had made early access to up to 25 per cent of pension savings with no tax penalties a central plank of their election bid, and Steven Webb, pensions minister, has urged that serious consideration be given to the proposal by the new coalition.

At present, pension savers are allowed to take a quarter of their pension pot as a tax free lump sum at retirement. Supporters of a policy change have argued that allowing savers to withdraw that percentage of savings early is likely to be revenue neutral.

One alternative is to allow savers to withdraw funds early without penalty but only for specified circumstances such as prolonged illness.

A Treasury spokeman made clear that discussion about such a policy is at a very preliminary stage and there are no assurances that changes to the present practice will be adopted. Nevertheless, it plans to issue a formal consultation document before the end of the year calling on interested parties to provide evidence.

There have been calls from several quarters for early access to pension savings, with some arguing that the inflexible nature of retirement savings are a significant obstacle to building pension pots. If individuals believed they could extract sums before retirement in certain circumstances, there may be greater willingness to save..

Moreover, there may be some savers facing particularly straitened circumstances following a period of unemployment where the ability to keep up with expenses such as mortgage payments becomes difficult. Withdrawing money early from pension savings may be preferable to losing one’s home to foreclosure because cash is not available to maintain monthly payments.

However, some pension advisers have cautioned that evidence from other countries where early access is available, such as the US, suggest that the practice leads to much less retirement savings in the long run. If tax incentives are offered to avoid the burden on the state of caring for older people, there is little merit in also offering tax incentives to allow early withdrawal of those funds, they said.

Copyright The Financial Times Limited 2017. All rights reserved.

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