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Saving time

Although the debate has cooled, the recent Budget did signal the Government&#39s continued commitment to asset-based welfare policies.

The child trust fund – or baby bond – remains in the pipeline and should be implemented before the next election. The savings gateway, a matched sav-ings policy for low-income adults, is being piloted from August.

One of the main drivers behind such asset-based welfare policies has been the desire for all people to accumulate an asset.

While these new policies are necessary, we should not forget that the current problem is not the absence of an asset-based policy – instead it is that we have the wrong asset-based policies which disproportionately benefit the wealthy. This is most notably the case with the use of tax relief to incentivise savings in the UK.

Tax relief on pensions now represents the primary incentive for saving for retirement. The figures involved make the cost of the child trust fund look like pocket money. However, it is highly regressive and is part of what has been described as the hidden welfare state – one which benefits the wealthy.

Those on higher incomes clearly gain most for two reasons. First, they are more likely to take advantage of tax-efficient savings as they have the money to save. Second, their rate of tax relief is likely to be higher.

It is also the case that tax relief might not even act as an effective incentive. Many people, particularly those on moderate incomes, who could potentially gain simply do not understand it.

The middle class, because they are more likely to be financially literate and have access to advice, will understand tax relief and use it.

In contrast, people on lower incomes, who will not have the same access to advice and are likely to be less financially literate, may not understand tax relief. As well as being made fairer, incentives need to become clearer.

The introduction of stakeholder pensions is likely to have had only a small impact on this situation. Indeed, those who do gain from stakeholder will be on moderate incomes and will not come from low-income households.

On its own, tax relief fails to provide appropriate incentives for people down the income scale to save for their retirement. This has led some to consider new fairer incentive structures. What might a more coherent system of incentives for saving look like?

There are a number of possibilities. One radical option would be to divorce completely the incentive people receive to save from the level of tax they pay.

Thinking ambitiously, a uniform incentive structure for savers could be dev-ised whereby incentives were equally distributed between all income groups.

This would mean every saver receiving a flat-rate state contribution to their saving regardless of the rate at which they pay tax, or indeed if they pay tax at all. This, in effect, would mean a credit for those on lower incomes. This is extremely ambitious.

More realistically, policy- makers can think about policies would help us move in the right direction. This could involve removing unfair elements of the current structure of incentives.

For example, thought should be given to the role of higher-rate tax relief. This provides people on high incomes with significant incentives to save and could be removed. Then there is the tax-free lump sum which can be taken by pensioners when they retire. The implications of removing these incentives need to be explored. It is also possible to envisage fairer policies which could incentivise saving for retirement. The asset-based welfare policies mentioned above are important because they use new methods of encouraging saving.

With the savings gateway, the state will match the individual&#39s savings. The child trust fund helps people to save by giving them a start in the form of an endowment. Both these incentives could be applied to pensions policy. An endowment would be a particularly useful and a simple option. It could be in the form of a starter stakeholder pension.

One of the problems faced by IFAs is getting people to think about saving for their retirement early enough. A starter stakeholder pension would provide an endowment which would give people a kickstart in their saving for retirement.

The Government endowment would be paid into the first pension people open. This would give them an incentive to open a stakeholder pension, into which they would be likely to continue to save.

It is also a clear incentive that all people will understand. The policy could either be available to all or targeted at those under a certain age or under a certain income.

A starter stakeholder pension is just one possible way of making the current structure of incentives to save clearer and fairer. More broadly, it indicates the need to think innovatively about how to ensure that more people have appropriate incentives to save for their retirement.

The IPPR will be publishing A Coherent and Progressive Asset-based Policy in September.

Will Paxton is research assistant, social policy at the Institute for Public Policy Research

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