Sidecar Savings

Sidecar savings are a new policy idea to encourage saving for retirement. A sidecar account is an instant access savings account that is tied to a pension. A sidecar would allow account holders to access savings in case of an emergency.

There are different models of sidecar accounts and these include the two account and in plan model. A two account model is being trialled in the UK. Under a two account model, a saver makes savings into a sidecar account up to a specified savings cap. Once the savings cap is reached, extra savings are then added on top of the normal pension contributions, thereby adding to pension savings. If a person withdraws money from the sidecar, then they begin saving again in the sidecar until the savings cap is reached again.

There are different arguments for sidecar savings. One set of arguments is rooted in behavioural economics and suggests that common behavioural biases means that the preferable retirement system should be one that includes savings locked in a pension and an instant access sidecar account. A different set of arguments claims that a sidecar can help certain groups overcome barriers to retirement savings caused by pressures from the cost of living.

Sidecar accounts can be placed within debates about having an adequate income in retirement. Having an adequate income in retirement means that it may be important for people to save beyond the default savings rate within automatic enrolment in a workplace pension. This seems important for particular groups such as Generation X (defined as those born between 1965 and 1980) and the self-employed.

Current challenges to sidecar savings include low take-up in the existing UK trial. Moving from an opt-in to an opt-out system may boost enrolment into the accounts. There are a range of other design issues that need exploring for any roll-out of sidecar savings, such as the size of the savings cap in a sidecar account.