Encouraging Savings in the UK A Lifetime Savings Framework The ‘LifeSaver’ 21st January 2002 Dr. Ros Altmann [email protected]

Encouraging Savings in the UK

A Lifetime Savings FrameworkThe ‘LifeSaver’

21st January 2002

Dr. Ros [email protected]

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

savings culture ‘LifeSaver’

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

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

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

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

Savings Initiatives Since 1997 Policies introduced by this Government:

ISA Stakeholder Pension Credit Raise capital limits for pensions PAT14 CAT FSA Financial Education in National Curriculum

New Savings Policy Proposals

Child Trust Fund ‘Baby Bond’ Savings Gateway

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.

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!

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 £12,280.47

(+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 £16,373.96

(+279%)

*£16 goes into pension, but £4 comes of tax bill

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)

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

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 ISA to new

Fixed term ISA to ‘locked’ pension section Fully transferable/hold any products

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’

LifeSaver

EDUCATION

A Framework for Organising and Encouraging Lifetime Savings

LifeSaver

Retirement Section – locked until retirement

ChildSectionE

DUCATION


Short Term Saving Section

Medium Term Investment Section

LifeSaver

ChildSection


EDUCATION




LifeSaver


ChildSection

ChildISA

Legend

Tax free

Taxable

EDUCATION

Child Trust Fund




LifeSaver


ChildSection

ChildISA

Legend

Tax free

Taxable

EDUCATION

Stake-holder

pension

Bankingaccount

Child Trust Fund

Parental contributions




Gifts

LifeSaver


ChildSection

ChildISA

Legend

Tax free

Taxable

EDUCATION

Stake-holder

pension

Bankingaccount

Child Trust Fund


Savings Gateway


Incentive at age 18

Mini-cashISA

Bankingaccount



Gifts

Earnings

LifeSaver


ChildSection

ChildISA

Legend

Tax free

Taxable

ISAUnit trusts

SharesBonds

Lifeproducts

PEPTESSA

VCTEIS

EDUCATION

Stake-holder

pension

Bankingaccount

Child Trust Fund


Savings Gateway


Mini-cashISA

Bankingaccount


NationalSavings


Gifts Incentive at age 18

Earnings

LifeSaver


ChildSection

ChildISA

Legend

Tax free

Taxable

ISAUnit trusts

SharesBonds

Lifeproducts

PEPTESSA

VCTEIS

EDUCATION

Stake-holder

pension

Bankingaccount

Child Trust Fund


Savings Gateway


Mini-cashISA

Bankingaccount


NationalSavings


Gifts

NEWFIXEDTERM

ISA

20% incentive +extra over time

Incentive at age 18

Earnings

LifeSaver


ChildSection

ChildISA

Legend

Tax free

Taxable

ISAUnit trusts

SharesBonds

Lifeproducts

StakeholderOther

pensions

PEPTESSA

VCTEIS

EDUCATION

Stake-holder

pension

Bankingaccount

Child Trust Fund


Savings Gateway


40% or 50% incentive

Mini-cashISA

Bankingaccount


NationalSavings


Gifts

NEWFIXEDTERM

ISA


Incentive at age 18

Earnings

LifeSaver


ChildSection

ChildISA

Legend

Tax free

Taxable


ISAUnit trusts

SharesBonds

Lifeproducts

StakeholderOther

pensions

PEPTESSA

VCTEIS

EDUCATION

Stake-holder

pension

Bankingaccount

Child Trust Fund


Savings Gateway

Earnings

Pensioncontributions


Mini-cashISA

Bankingaccount


NationalSavings


Gifts

Inheritances

NEWFIXEDTERM

ISA


Incentive at age 18

LifeSaver


ChildSection

Direct debits

Credit card debt

Educational fees

Emergency loans

ChildISA

Legend

Tax free

Taxable


ISAUnit trusts

SharesBonds

Lifeproducts

StakeholderOther

pensions

PEPTESSA

VCTEIS

EDUCATION

Stake-holder

pension

Bankingaccount

Child Trust Fund


Savings Gateway

Earnings



Mini-cashISA

Bankingaccount


NationalSavings


Gifts

Inheritances

Life/health insurance

NEWFIXEDTERM

ISA


Incentive at age 18

equityrelease

LifeSaver


ChildSection

Direct debits

Credit card debt

Educational fees

Emergency loans

Mortgage

ChildISA

Housing

Legend

Tax free

Taxable


ISAUnit trusts

SharesBonds

Lifeproducts

StakeholderOther

pensions

PEPTESSA

VCTEIS

Tax free lump sum

B E Q U E S T S

EDUCATION

Stake-holder

pension

Bankingaccount

Child Trust Fund


Savings Gateway

Earnings



Withdrawals fromDC pension

40% tax

Long TermCare

Mini-cashISA

Bankingaccount


NationalSavings


Gifts

Inheritances

Life/health insurance

NEWFIXEDTERM

ISA


marginal rate tax

Minimumannuity

Incentive at age 18

New Government ‘Savings Incentive’Some suggested limits to discuss

Withdrawable ISA - up to £2,000pa no tax on withdrawal

Fixed term ISA up to £5,000pa 20% + more over time

Pension first £1,500 50% next £1,500 40% next £3,000 30% next £20,000 25% next £70,000 20% above £96,000 0% Taxed on withdrawal, growth tax free

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

Thank you for listening

Dr. Ros Altmann

[email protected]

Documents

Encouraging Savings in the UK A Lifetime Savings Framework The ‘LifeSaver’ 21st January 2002 Dr. Ros Altmann [email protected]