Encouraging Savings in the UK

Transcription

1 Encouraging Savings in the UK A Lifetime Savings Framework The LifeSaver 21st January 2002 Dr. Ros Altmann ros.altmann@genesys.net

2 Outline! UK savings situation! Barriers to saving! Government savings policy! Tax relief and fairer incentives! Framework to facilitate lifetime savings culture! LifeSaver

3 Current UK Savings Situation! High per capita savings relative to Europe! Good retirement savings culture! BUT mostly from occupational DB schemes! UK State pension very low! Switch to DC and policy moves to individualism! =>increasingly inadequate pensions, rising cost of State support, more poverty

4 Current Problems! Risks/difficulties of saving are greater than the risks/difficulties of NOT saving! Very low savings among low income groups! Poverty does not explain low saving levels! lack of access! complexity of products! lack of sufficient incentive! lack of information/education

5 Problems of Current UK Saving System, Why Don t People Save Enough? General Barriers:! Psychological inhibitors! apathy/inertia/boredom! Complexity of system! Lack of education! Lack of understanding! Lack of confidence! scandals! Not willing to pay for advice Barriers for Poor:! Savings trap in means testing! Pension credit! tax 40%+! Perception of security from benefits system/ Social Fund! Social exclusion in advice! Tax relief discriminates against poor

6 Aims of Government Savings Policy! Spread benefits of savings/assets to all! Increase saving/assets for poor! Young to enter adulthood with assets! Encourage higher and more regular savings! Improve financial education! 60/40 to 40/60 for pensions

7 Savings Initiatives Since 1997! Policies introduced by this Government:!! Stakeholder! Pension Credit! Raise capital limits for pensions! PAT14! CAT! FSA! Financial Education in National Curriculum

8 New Savings Policy Proposals! Trust Fund Baby Bond! Savings Gateway

9 Current Savings Incentives! Generous pensions tax relief! Range of tax free products! Most saving can be done tax free! BUT...! Tax relief is not much incentive for lower income groups. It favours the rich.

10 Tax Relief Offers Much Better Incentive For Better Off! Assume a pension fund of 10,000! 2,500 can be taken as lump sum! 20% relief in/20% on retmt: 500 subsidy! 40% relief in/40% on retmt: 1,000 subsidy! 40% relief in/20% on retmt: 2,500 subsidy! i.e. If paying 40% tax on contributing and 20% in retirement, you get 5 times more tax subsidy than lower income groups!

11 Tax Relief System Exacerbates Wealth Inequality! 20% taxpayer! puts in 12 per month for 30 years! Government puts in 3 per month on top! Over 30 yrs total from Government = 1,080! Pension pot at 5% growth 12, (+184%)! 40% taxpayer! puts in 12 NET* per month for 30 years! Government effectively puts in 8 per month on top ( 4 into pension, 4 off tax bill)! Over 30 yrs total from Government = 2,880! Pension pot at 5% growth 16, (+279%) * 16 goes into pension, but 4 comes of tax bill

12 New Saving Incentives System! Tax relief unfair - gives higher incentive to the better off! This is the wrong way round!! Replace tax relief with government saving incentive! Everyone to receive same incentive for same savings - monetary limits, standard grossing up (stakeholder sets precedent)

13 What Do We Need To Do?! Establish lifetime savings culture! Encourage more people to WANT to save! Make saving simpler! Offer fairer and better incentives! Integrate financial products into coherent system! Improve financial education! LifeSaver can address these

14 So, What is the Lifetime Savings Framework?! Framework includes government incentives to encourage savings through lifetime! Coherent framework for all tax favoured vehicles/other investments/borrowing! One stop shop for lifetime financial needs! Bank account, progressing to to new Fixed term to locked pension section! Fully transferable/hold any products

15 Facilities of the LifeSaver! Benefit from grossing up of savings! Can borrow against the fund e.g. for education, mortgage, emergency loans! Incorporate life insurance, health insurance! Build in financial education! Manage credit card debt! Keep track of all DC pension entitlements! Help support during gradual retirement

16 A Framework for Organising and Encouraging Lifetime Savings LifeSaver E D U C A T I O N

17 A Framework for Organising and Encouraging Lifetime Savings LifeSaver E D U C A T I O N Section Short Term Saving Section Medium Term Investment Section Retirement Section locked until retirement

18 A Framework for Organising and Encouraging Lifetime Savings LifeSaver E D U C A T I O N Section Short Term Saving Section Medium Term Investment Section Retirement Section locked until retirement

19 A Framework for Organising and Encouraging Lifetime Savings Trust Fund LifeSaver E D U C A T I O N Section Short Term Saving Section Medium Term Investment Section Retirement Section locked until retirement Legend Tax free Taxable

20 A Framework for Organising and Encouraging Lifetime Savings E D U C A T I O N Trust Fund Parental contributions Gifts Section Stakeholder pension LifeSaver Banking account Short Term Saving Section Medium Term Investment Section Retirement Section locked until retirement Legend Tax free Taxable

21 A Framework for Organising and Encouraging Lifetime Savings E D U C A T I O N Trust Fund Parental contributions Gifts Savings Gateway Earnings Section Stakeholder pension LifeSaver Banking account Incentive at age 18 Mini-cash Short Term Saving Section Banking account Medium Term Investment Section Retirement Section locked until retirement Legend Tax free Taxable

22 A Framework for Organising and Encouraging Lifetime Savings E D U C A T I O N Trust Fund Parental contributions LifeSaver Section Gifts Incentive at age 18 Savings Gateway Earnings Stakeholder pension Banking account PEP TESSA VCT EIS Mini-cash Short Term Saving Section National Savings Banking account Medium Term Investment Section Unit trusts Shares Bonds Life products Retirement Section locked until retirement Legend Tax free Taxable

23 A Framework for Organising and Encouraging Lifetime Savings E D U C A T I O N Trust Fund Parental contributions Gifts Savings Gateway Earnings Section Stakeholder pension NEW FIXED TERM LifeSaver Banking account Incentive at age 18 PEP TESSA VCT EIS Mini-cash Short Term Saving Section 20% incentive + extra over time National Savings Banking account Medium Term Investment Section Unit trusts Shares Bonds Life products Retirement Section locked until retirement Legend Tax free Taxable

24 A Framework for Organising and Encouraging Lifetime Savings E D U C A T I O N Trust Fund Parental contributions Gifts Savings Gateway Earnings Section Stakeholder Stakeholder pension NEW FIXED TERM LifeSaver Banking account Incentive at age 18 PEP TESSA VCT EIS Other pensions Mini-cash Short Term Saving Section 20% incentive + extra over time National Savings Banking account Medium Term Investment Section 40% or 50% incentive Unit trusts Shares Bonds Life products Retirement Section locked until retirement Legend Tax free Taxable

25 A Framework for Organising and Encouraging Lifetime Savings E D U C A T I O N Trust Fund Parental contributions Gifts Savings Gateway Earnings Inheritances Pension contributions Section Stakeholder Stakeholder pension NEW FIXED TERM LifeSaver Banking account Incentive at age 18 PEP TESSA VCT EIS Medium Term Investment Section 40% or 50% incentive Other pensions Mini-cash Short Term Saving Section 20% incentive + extra over time National Savings Banking account Unit trusts Shares Bonds Life products Retirement Section locked until retirement Legend Tax free Taxable

26 A Framework for Organising and Encouraging Lifetime Savings E D U C A T I O N Trust Fund Parental contributions Gifts Savings Gateway Earnings Inheritances Pension contributions Section Stakeholder Stakeholder pension NEW FIXED TERM LifeSaver Banking account Incentive at age 18 PEP TESSA VCT EIS Medium Term Investment Section 40% or 50% incentive Other pensions Mini-cash Short Term Saving Section 20% incentive + extra over time National Savings Banking account Unit trusts Shares Bonds Life products Direct debits Credit card debt Life/health insurance Educational fees Emergency loans Retirement Section locked until retirement Legend Tax free Taxable

27 A Framework for Organising and Encouraging Lifetime Savings E D U C A T I O N Trust Fund Parental contributions Gifts Savings Gateway Earnings Inheritances Pension contributions Section Stakeholder Stakeholder pension NEW FIXED TERM LifeSaver Banking account Incentive at age 18 PEP TESSA VCT EIS Medium Term Investment Section 40% or 50% incentive Other pensions Mini-cash Short Term Saving Section 20% incentive + extra over time National Savings Banking account Unit trusts Shares Bonds Life products Direct debits Credit card debt Life/health insurance Educational fees Emergency loans Mortgage Housing Retirement Section locked until retirement marginal rate tax 40% tax equity release Legend Tax free Taxable Tax free lump sum Minimum annuity B E Q U E S T S Withdrawals from DC pension Long Term Care

28 What Happens To Pensions?! As DC matures and grows, supply of assets to back annuities runs out! Ensure people have enough not to fall back on the State! Minimum annuity (from pension or ER?)! Freedom to withdraw rest, but tax must be paid first! Tax must be paid on death

29 Thank you for listening Dr. Ros Altmann

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