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Darling gives credit to savers

“Virtue is its own reward” has been a proverb since Roman times but has had little resonance for savers since the launch of the modern welfare state.

All too often, it seems the spend-as-you-earn brigade have been bailed out in retirement by the state while many of those who saved for a rainy day have been left feeling they need not have bothered.

Social Security Secretary Alistair Darling has dubbed it the “savings trap”. The net effect has been to help generate a culture of complacency about saving for retirement, which helps explain recent research showing more than a quarter of all workers do not have any savings to retire on.

But, in what may prove to be a seminal speech to the Institute of Public Policy Research, Darling has signalled that if Labour is returned to Government at the next election, tangible steps will be taken which will reward saving.

In particular, he foreshadowed the forthcoming launch of a consultation paper on a new pension credit which “won&#39t just remove the penalty for saving, it will create a reward for saving”.

One focus of Darling&#39s attention is the system of capital rules for pensioners which discourage saving by denying extra help for those who have put aside a modest amount. Currently, those with savings of more than £3,000 start losing means-tested benefits and those with savings over £8,000 receive none at all.

Darling pointed out in his speech that the system assumes some people are getting a “ludicrous” 20 per cent return on their savings and he suggested that the capital limit should be scrapped.

A fairer way of deciding who receives extra help would be to examine the income that pensioners receive on their savings, said Darling. But he wants to go further and create a positive reward for saving.

The pension credit will reward people for having an income from a modest occupational pension or other savings. On top of the minimum income guarantee, for every pound saved, pensioners will receive a cash bonus.

The Mig pays income support to top up single people&#39s income to £78.45 a week and couples to £121.95 but curr-ently every pound of personal income means a pound less is received in state benefit.

Instead of being in a situation where they have too much income to qualify for the Mig but too little to raise their standard of living, pensioners will earn a top-up that gives them a higher weekly income than if they were relying on the Mig or solely on their savings.

One possibility is that every £1 a week of personal income will entitle a pensioner to a credit of, say, 50p a week of state benefit until total income reaches £100 a week for a single person or £150 a week for a married couple.

As Darling himself put it, the credit should ensure that people “who save even small amounts will get extra help to reward their thrift”.

He says the Government is giving a clear message – that it always pays to save.

Darling&#39s speech has received a muted reception from some of the organisations committed to promoting the needs of older people. Help the Aged was reported as being “lukewarm” about the concept of a pension credit, while Age Concern argued that an increase in the basic pension remains the simplest way of tackling poverty in retirement and rewarding saving.

Plainly, it would be unwise to jump to too many conclusions in advance of the publication of the formal consult-ation paper later in the autumn. The lesson of the stakeholder consultation exercise is that the Government does respond to reasoned and well-pres-ented technical arguments on pension provision.

But even at this early stage, we can identify two broad themes which are of direct relevance to IFAs.

First, the speech confirms the Government&#39s commitment to creating a climate in which tomorrow&#39s pensioners will believe it is worthwhile saving for their retirement and today&#39s pensioners will have their saving rewarded.

This is a laudable, if somewhat daunting ambition. But if the Government is successful in achieving it, there could be huge opportunities for everyone involved in the long-term savings industry – providers and advisers alike.

The “savings trap” will be reduced or eliminated and the incentive to save will be all the greater. A fundamental barrier which stands in the way of the industry maximising its growth will be removed.

Second, what Darling called the “traditional compact” between the individual and state is continuing to put a greater emphasis on private initiative. The role of the private sector in pension provision has never been more clearly recognised or firmly established – and this under a Labour Government.

As a result, the trend towards longer-term savings vehicles that we have already seen in recent years could not only be accelerated but could be extended to a whole new range of people as the value of saving for retirement becomes ever clearer. This is a clear signal that the market for financial advice can continue to grow significantly in the years ahead.

It is already recognised that the number of people in the UK with substantial amounts of money to invest is growing rapidly and this represents a very attractive market for IFAs.

At the same time, Darling&#39s proposals imply that the number of people with modest amounts of money to invest may grow dramatically as well. That represents a different but also attractive market.

So far, at least, the pension credit represents a positive step forward.

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