No government and its taxpayers can afford an open-ended commitment to fund a large proportion of the population. Individuals have to be encouraged to become responsible “owners”, not increasingly dependent on state benefits. The country needs a practical savings strategy that is long term, consistent, joined-up and wholly appropriate to today’s society.
Cheap credit has fuelled excessive property price rises, mortgage and credit card debt and has given many people the illusion of easy wealth. In the last 10 years, the proportion of income saved by private individuals has dropped from 8 per cent to 1 per cent. Sadly and inevitably, some are now learning the hard way that we must stop living beyond our means.
History shows us though that difficult financial times prompt everyone to act more cautiously and make us much more inclined to save. This is therefore the time to act – to establish financial awareness and saving as mainstays of the future economic stability of every UK household.
Government-incentivised saving already exists. Some schemes work better than others. Yet few are able to dovetail sufficiently to create what people really need – a meaningful platform for saving for life.
This manifesto is not proposing a sudden shift to a new world order. Change needs to support, not undermine, existing schemes.
The important thing is to look to the long term – to identify consumer needs and then, harnessing these with Government objectives, to design a holistic savings structure – one that is attractive to consumers, technologically feasible and that can deliver.
Whether just starting a first job, in mid-career or coming up to retirement, whether working in the private or the public sector, whether seasoned investors or new to financial services, people need to be encouraged to engage in savings. We need to move to a position where everyone who can, accepts responsibility for their financial security. There is no alternative.
Tisa calls for:
1: A national savings strategy that is long term, consistent, joined-up and wholly appropriate to today’s society.
This is the fundamental building block in establishing customer confidence in the value of long-term savings.
A relevant, simple to understand strategy with streamlined schemes that are easy to use and compatible with one another will benefit and appeal to the public.
The Government will benefit because of improving take-up, reduced levels of bureaucracy and speedier resolution of its long-term objectives.
Streamlined and simplified, compatible products run on effective systems diminish the likelihood of administrative error, generate economies of scale and help to improve the overall customer experience. The financial services industry already recognises that it needs to make better use of improved technology if it is to serve its clients well. And if lower costs and charges are passed on to consumers, investors immediately benefit from better returns.
2: The implementation of automatic enrolment into pension schemes and workplace savings before 2012 or at the same time as the rollout of personal accounts
The public benefits as the number of people with little or no pension provision diminishes as more employers are encouraged to set up schemes with employer contributions. This reduces the strain on taxpayers.
The Government benefits because people will start saving earlier towards funding their long-term financial needs and schemes established now will reduce the pressures after 2012.
In turn, this should encourage the financial services industry to revisit existing empty schemes – those with no contributions – and to take a more active role in informing and educating its customers and fulfilling government policy.
3: Workplace Isas – in addition to or instead of a pension – which should be based on child trust fund principles and rules, locked in until a defined time with a range of investments permitted
The public would benefit, in that pensions are not necessarily the best retirement savings vehicle for everyone and nor do all members of the public necessarily like or trust them. Some companies are now subscribing to standard Isas on behalf of their employers as an alternative to pensions, giving staff greater choice and flexibility.
The Government would be seen to be giving people greater choice, especially those on lower incomes, rather than imposing pensions on the unconvinced.
Take-up rates would therefore be likely to be higher, although employers would need to have these schemes approved so that contributions would not be subject to an additional National Insurance liability.
The industry would be offering a straightforward, easy to understand savings package in which the public could have a greater confidence.
Tisa also calls for basic changes on the retirement savings front:
4: The ability to transfer directly the 25 per cent tax- free pension drawdown into an Isa. This should be outside the individual’s annual Isa subscription limits.
The public benefits from being able to retain tax-free savings and investments in a tax-free environment until required.
The Government benefits as it would immediately encourage the take-up of pensions and would help demonstrate the Government’s commitment to improving the long-term status of private savings.
The financial services industry would be in a position to design simplified and more cost-effective integrated savings and retirement products.
5: Pension pots under £2,000 to be trivially commuted, regardless of other pensions or their value
People who have built up one or more very small pension pots would no longer have to try to establish their value simultaneously or find an annuity provider for pensions of low value.
The Government would be demonstrating that it genuinely understands the plight of consumers, particularly those on low incomes. This is one of the most complex and complicated administrative areas in financial services. It is costly to operate and frustrating to explain to confused customers. Consigning it to history would create the opportunity for a fresh start in terms of boosting public confidence in a holistic savings system.
6: The age for compulsory annuitisation of pensions to be increased from 75 to 80
Given Western society’s increased longevity and the UK’s low annuity rates, this would enable people to stay in non-cash investments for longer. The later the purchase of the annuity the higher the annual payment. Furthermore, the likelihood that some of the pension value might still be transferred is increased.
The Government would be able to demonstrate political consistency with its current intent to raise the state pension age.
The industry would be able to promote a fairer product with improved value.
Tisa is also calling for basic changes on the general savings front:
7: Annual subscription limits should be annually upgraded to keep pace with inflation
8: On death, the holdings in an isa should be transferable to a spouse or legal partner and remain within the ISA wrapper
Savings schemes are often set up by and in the name of the major earner. This means that, on death, the tax benefit accrued by the family is lost. By making the Isa inheritable, the tax benefit would be retained – a major benefit to the public.
The Government would be improving fairness for all and creating an imaginative and more family-friendly savings environment.
The industry would benefit from reduced administration and business retention.
Tisa calls for joined-up awareness-raising campaigns
9: Children’s savings – a schools week – not just for seven-year-olds but for all school years
The general public benefits from its increased engagement in the child trust fund scheme across generations, improving awareness and understanding, establishing the importance of building for their children’s, grandchildren’s and young people’s future and enhancing the prospects of financial inclusion.
Government benefits from an increase in the success of the scheme and the fulfilment of its social objectives. A beneficial side effect will be the potential to help improve the level of general literacy and numeracy skills.
The financial services industry could lend its support to such campaigns.
10: Financial inclusion – a national launch of the savings gateway scheme
This will help individuals become more self-sufficient, enabling them to manage their financial affairs more effectively.
The Government benefits from having to provide financial support to fewer people.
Greater commitment to savings by more people means that the industry can start to plan and develop simple and straightforward products that can benefit from economies of scale.
11: Gathering momentum – savings gateway convertible into a cash Isa
Having provided the start, the next step that these new savers need is encouragement to continue.
The Government can maximise the positive benefit of the scheme for the long term.
The industry is there to provide the solutions.
Tisa Savings Manifesto