Encouraging Savings in the UK

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Encouraging Savings in the UK

• A Lifetime Savings Framework
• The LifeSaver
• 21st January 2002
• Dr. Ros Altmannros.altmann_at_genesys.net

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Outline

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

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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
• gtincreasingly inadequate pensions, rising cost
  of State support, more poverty

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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

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Problems of Current UK Saving System,Why Dont
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

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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

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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

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New Savings Policy Proposals

• Child Trust Fund Baby Bond
• Savings Gateway

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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.

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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!

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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

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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)

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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

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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

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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

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A Framework for Organising and Encouraging
Lifetime Savings
LifeSaver
E D U C A T I O N
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A Framework for Organising and Encouraging
Lifetime Savings
LifeSaver
E D U C A T I O N
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A Framework for Organising and Encouraging
Lifetime Savings
LifeSaver
E D U C A T I O N
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A Framework for Organising and Encouraging
Lifetime Savings
LifeSaver
Child ISA
Child Section
E D U C A T I O N
Short Term Saving Section
Medium Term Investment Section
Retirement Section locked until retirement
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A Framework for Organising and Encouraging
Lifetime Savings
LifeSaver
Child ISA
Stake- holder pension
Banking account
Child Section
E D U C A T I O N
Short Term Saving Section
Medium Term Investment Section
Retirement Section locked until retirement
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A Framework for Organising and Encouraging
Lifetime Savings
LifeSaver
Child Trust Fund
Child ISA
Stake- holder pension
Banking account
Child Section
E D U C A T I O N
Mini-cash ISA
Banking account
Short Term Saving Section
Medium Term Investment Section
Retirement Section locked until retirement
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A Framework for Organising and Encouraging
Lifetime Savings
LifeSaver
Child Trust Fund
Child ISA
Stake- holder pension
Banking account
Child Section
E D U C A T I O N
Mini-cash ISA
Banking account
Short Term Saving Section
ISA
Unit trusts Shares Bonds
Life products
PEP TESSA VCT EIS
National Savings
Medium Term Investment Section
Retirement Section locked until retirement
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A Framework for Organising and Encouraging
Lifetime Savings
LifeSaver
Child Trust Fund
Child ISA
Stake- holder pension
Banking account
Child Section
E D U C A T I O N
Mini-cash ISA
Banking account
Short Term Saving Section
NEW FIXED TERM ISA
ISA
Unit trusts Shares Bonds
Life products
PEP TESSA VCT EIS
National Savings
Medium Term Investment Section
Retirement Section locked until retirement
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A Framework for Organising and Encouraging
Lifetime Savings
LifeSaver
Child Trust Fund
Child ISA
Stake- holder pension
Banking account
Child Section
E D U C A T I O N
Mini-cash ISA
Banking account
Short Term Saving Section
NEW FIXED TERM ISA
ISA
Unit trusts Shares Bonds
Life products
PEP TESSA VCT EIS
National Savings
Medium Term Investment Section
Other pensions
Stakeholder
Retirement Section locked until retirement
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A Framework for Organising and Encouraging
Lifetime Savings
LifeSaver
Child Trust Fund
Child ISA
Stake- holder pension
Banking account
Child Section
E D U C A T I O N
Mini-cash ISA
Banking account
Short Term Saving Section
20 incentive extra over time
NEW FIXED TERM ISA
ISA
Unit trusts Shares Bonds
Life products
PEP TESSA VCT EIS
National Savings
Medium Term Investment Section
40 or 50 incentive
Other pensions
Stakeholder
Retirement Section locked until retirement
26
A Framework for Organising and Encouraging
Lifetime Savings
LifeSaver
Child Trust Fund
Child ISA
Stake- holder pension
Banking account
Child Section
E D U C A T I O N
Mini-cash ISA
Banking account
Short Term Saving Section
20 incentive extra over time
NEW FIXED TERM ISA
ISA
Unit trusts Shares Bonds
Life products
PEP TESSA VCT EIS
National Savings
Medium Term Investment Section
40 or 50 incentive
Other pensions
Stakeholder
Pension contributions
Retirement Section locked until retirement
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A Framework for Organising and Encouraging
Lifetime Savings
LifeSaver
Child Trust Fund
Child ISA
Stake- holder pension
Banking account
Child Section
E D U C A T I O N
Direct debits
Mini-cash ISA
Banking account
Short Term Saving Section
20 incentive extra over time
Educational fees
NEW FIXED TERM ISA
ISA
Unit trusts Shares Bonds
Life products
PEP TESSA VCT EIS
National Savings
Emergency loans
Medium Term Investment Section
40 or 50 incentive
Other pensions
Stakeholder
Pension contributions
Retirement Section locked until retirement
Long Term Care
B E Q U E S T S
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New Government Savings IncentiveSome
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

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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

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Thank you for listening

• Dr. Ros Altmannros.altmann_at_genesys.net

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