Workplace pension savers could soon have auto-enrolled easy access savings accounts alongside their pensions.
The initiative, dubbed the “pensions sidecar” has been launched in a trial by auto-enrolled pensions giant NEST Pensions.
The government-backed master trust wants to see if including an extra savings pot alongside workers’ pension savings can help improve individual’s financial resilience.
While auto enrolment is considered a big success, with millions now saving for retirement, short-term savings still represent a big problem in the UK savings landscape.
According to the Money Advice Services (MAS) just 44% of workers in the UK have liquid savings of £500 or more to fall back on for emergencies.
The sidecar is designed to combat this by automatically siphoning a worker’s wage into a savings pot before they receive a pay check, like pension contributions. Savers will have easy access to the funds, to help with financial emergencies.
Michael Royce, strategic lead on budgeting and saving at the Money Advice Service, comments: “Many millions of adults who are ‘financially squeezed’ or ‘financially struggling’ lack a savings buffer to help them cope if they were to face an unexpected bill.
“All too often, these costs can lead to financial difficulty. This is why the Money Advice Service is delighted to be partnering with NEST Insight to test the innovative concept of sidecar savings.
“We hope that it builds on emerging evidence that workplace savings initiatives can be an effective means of helping people enhance their financial resilience throughout their working lives both for the short-to-medium term and for when they move into retirement.”
Even a small buffer of £1,000 can have a siginficant positive impact for individuals in need of emergency cash, as it helps people avoid turning to risky credit providers such as payday lenders.
Moneywise asked the Department for Work and Pensions (DWP) for its opinion on the sidecar initiative. A DWP spokesperson says: “NEST’s ‘sidecar’ approach is an innovative concept, potentially offering a new way for people to build up a financial buffer to protect them from unexpected bills while continuing to save in workplace pensions.
"We are interested to see how the trial develops and will be watching it closely.”
How it works
Any participant in the sidecar scheme would automatically have their money put into an easy-access savings account until a predetermined threshold is reached, after which all contributions are paid into the illiquid pension pot.
If a withdrawal is made from the savings pot, contributions would then defer back to it until it hit the cap again.
However, as of yet it is not clear what rate of interest the money in the sidecar pot will have. NEST tells Moneywise that the rate will be “competitive” compared to other savings accounts on the market.
The account is adminstered by a firm called Salary Finance, whose accounts' deposits are in fact held with Yorkshire Building Society. Currently the building society offers 0.75% interest with its online savings account, and 1.35% for a single access saver.
NEST says the trial is due to start in the next few months. Shoe repair retailer Timpson, with 5,600 employees, is the first company announced as participating in the trial, with more set to be announced in the near future. Timpson employees will begin contributing to their sidecars at the beginning of 2019.
James Timpson, chief executive at Timpson, says: “Our colleagues are the heart and soul of our company, and when they’re happy they provide the very best service to our customers. Financial wellbeing is an important part of this.
“We know that money worries can have a really negative impact on colleagues’ health, happiness, and productivity at work.
“We’re delighted to be taking part in NEST Insight’s sidecar savings trial to help our employees become more financially resilient, both today and into their retirement.”
The trial is due to be conducted for two years to assess sign-up rates, savings levels and impact on individual financial wellbeing.