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Transcript
Encouraging Savings in the UK
A Lifetime Savings Framework
The ‘LifeSaver’
21st January 2002
Dr. Ros Altmann
[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


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
apathy/inertia/boredom
Complexity of system
Lack of education
Lack of understanding
Lack of confidence

Barriers for Poor:



scandals
Not willing to pay for
advice
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




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

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’
A Framework for Organising and Encouraging Lifetime Savings
LifeSaver
E
D
U
C
A
T
I
O
N
A Framework for Organising and Encouraging Lifetime Savings
LifeSaver
E
D
U
C
A
T
I
O
N
Child
Section
Short Term Saving Section
Medium Term Investment Section
Retirement Section – locked until retirement
A Framework for Organising and Encouraging Lifetime Savings
LifeSaver
E
D
U
C
A
T
I
O
N
Child
Section
Short Term Saving Section
Medium Term Investment Section
Retirement Section – locked until retirement
A Framework for Organising and Encouraging Lifetime Savings
LifeSaver
Child Trust Fund
Child
Section
E
D
U
C
A
T
I
O
N
Child
ISA
Short Term Saving Section
Medium Term Investment Section
Retirement Section – locked until retirement
Legend
Tax free
Taxable
A Framework for Organising and Encouraging Lifetime Savings
LifeSaver
Child Trust Fund
Parental contributions
E
D
U
C
A
T
I
O
N
Child
Section
Child
ISA
Stakeholder
pension
Banking
account
Gifts
Short Term Saving Section
Medium Term Investment Section
Retirement Section – locked until retirement
Legend
Tax free
Taxable
A Framework for Organising and Encouraging Lifetime Savings
LifeSaver
Child Trust Fund
Parental contributions
E
D
U
C
A
T
I
O
N
Gifts
Savings Gateway
Child
Section
Child
ISA
Stakeholder
pension
Banking
account
Incentive at age 18
Mini-cash
ISA
Banking
account
Earnings
Short Term Saving Section
Medium Term Investment Section
Retirement Section – locked until retirement
Legend
Tax free
Taxable
A Framework for Organising and Encouraging Lifetime Savings
LifeSaver
Child Trust Fund
Parental contributions
E
D
U
C
A
T
I
O
N
Child
Section
Child
ISA
Gifts
Stakeholder
pension
Banking
account
Incentive at age 18
Savings Gateway
Mini-cash
ISA
Banking
account
Earnings
Short Term Saving Section
ISA
PEP
TESSA
VCT
EIS
National
Savings
Unit trusts
Shares
Bonds
Medium Term Investment Section
Retirement Section – locked until retirement
Legend
Tax free
Taxable
Life
products
A Framework for Organising and Encouraging Lifetime Savings
LifeSaver
Child Trust Fund
Parental contributions
E
D
U
C
A
T
I
O
N
Child
Section
Child
ISA
Gifts
Stakeholder
pension
Banking
account
Incentive at age 18
Savings Gateway
Mini-cash
ISA
Banking
account
Earnings
Short Term Saving Section
20% incentive +
extra over time
ISA
NEW
FIXED
TERM
ISA
PEP
TESSA
VCT
EIS
National
Savings
Unit trusts
Shares
Bonds
Medium Term Investment Section
Retirement Section – locked until retirement
Legend
Tax free
Taxable
Life
products
A Framework for Organising and Encouraging Lifetime Savings
LifeSaver
Child Trust Fund
Parental contributions
E
D
U
C
A
T
I
O
N
Child
Section
Child
ISA
Stakeholder
pension
Gifts
Banking
account
Incentive at age 18
Savings Gateway
Mini-cash
ISA
Banking
account
Earnings
Short Term Saving Section
20% incentive +
extra over time
ISA
NEW
FIXED
TERM
ISA
PEP
TESSA
VCT
EIS
National
Savings
Unit trusts
Shares
Bonds
Medium Term Investment Section
40% or 50%
incentive
Stakeholder
Other
pensions
Retirement Section – locked until retirement
Legend
Tax free
Taxable
Life
products
A Framework for Organising and Encouraging Lifetime Savings
LifeSaver
Child Trust Fund
Parental contributions
E
D
U
C
A
T
I
O
N
Child
Section
Child
ISA
Stakeholder
pension
Gifts
Banking
account
Incentive at age 18
Savings Gateway
Mini-cash
ISA
Banking
account
Earnings
Short Term Saving Section
20% incentive +
extra over time
Inheritances
ISA
NEW
FIXED
TERM
ISA
PEP
TESSA
VCT
EIS
National
Savings
Unit trusts
Shares
Bonds
Medium Term Investment Section
40% or 50%
incentive
Pension
contributions
Stakeholder
Other
pensions
Retirement Section – locked until retirement
Legend
Tax free
Taxable
Life
products
A Framework for Organising and Encouraging Lifetime Savings
LifeSaver
Child Trust Fund
Parental contributions
E
D
U
C
A
T
I
O
N
Child
Section
Child
ISA
Stakeholder
pension
Gifts
Banking
account
Incentive at age 18
Direct debits
Savings Gateway
Mini-cash
ISA
Banking
account
Credit card debt
Earnings
Short Term Saving Section
Life/health insurance
20% incentive +
extra over time
Educational fees
Inheritances
ISA
NEW
FIXED
TERM
ISA
PEP
TESSA
VCT
EIS
National
Savings
Unit trusts
Shares
Bonds
Medium Term Investment Section
40% or 50%
incentive
Pension
contributions
Stakeholder
Other
pensions
Retirement Section – locked until retirement
Legend
Tax free
Taxable
Life
products
Emergency loans
A Framework for Organising and Encouraging Lifetime Savings
LifeSaver
Child Trust Fund
Parental contributions
E
D
U
C
A
T
I
O
N
Child
Section
Child
ISA
Stakeholder
pension
Gifts
Banking
account
Incentive at age 18
Direct debits
Savings Gateway
Mini-cash
ISA
Banking
account
Credit card debt
Earnings
Short Term Saving Section
Life/health insurance
20% incentive +
extra over time
Educational fees
Inheritances
ISA
NEW
FIXED
TERM
ISA
PEP
TESSA
VCT
EIS
National
Savings
Unit trusts
Shares
Bonds
Life
products
Emergency loans
Mortgage
Medium Term Investment Section
40% or 50%
incentive
Pension
contributions
Stakeholder
Other
pensions
Housing
Retirement Section – locked until retirement
marginal rate tax
Legend
Tax free
Tax free
lump sum
Minimum
annuity
40% tax
equity
release
Withdrawals from
DC pension
Taxable
BEQUESTS
Long Term
Care
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%

Pension


+
more over time
first £1,500
next £1,500
next £3,000
next £20,000
next £70,000
above £96,000
Taxed on withdrawal, growth tax free
50%
40%
30%
25%
20%
0%
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]