Encouraging Savings in the UK A Lifetime Savings Framework The ‘LifeSaver’ 21st January 2002 Dr. Ros Altmann

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 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

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, (+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, (+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 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’

LifeSaver EDUCATIONEDUCATION A Framework for Organising and Encouraging Lifetime Savings

LifeSaver Retirement Section – locked until retirement Child Section EDUCATIONEDUCATION A Framework for Organising and Encouraging Lifetime Savings Short Term Saving Section Medium Term Investment Section

LifeSaver Child Section Retirement Section – locked until retirement EDUCATIONEDUCATION A Framework for Organising and Encouraging Lifetime Savings Short Term Saving Section Medium Term Investment Section

LifeSaver Retirement Section – locked until retirement Child Section Child ISA Legend Tax free Taxable EDUCATIONEDUCATION Child Trust Fund A Framework for Organising and Encouraging Lifetime Savings Short Term Saving Section Medium Term Investment Section

LifeSaver Retirement Section – locked until retirement Child Section Child ISA Legend Tax free Taxable EDUCATIONEDUCATION Stake- holder pension Banking account Child Trust Fund Parental contributions A Framework for Organising and Encouraging Lifetime Savings Short Term Saving Section Medium Term Investment Section Gifts

LifeSaver Retirement Section – locked until retirement Child Section Child ISA Legend Tax free Taxable EDUCATIONEDUCATION Stake- holder pension Banking account Child Trust Fund Parental contributions Savings Gateway A Framework for Organising and Encouraging Lifetime Savings Incentive at age 18 Mini-cash ISA Banking account Short Term Saving Section Medium Term Investment Section GiftsEarnings

LifeSaver Retirement Section – locked until retirement Child Section Child ISA Legend Tax free Taxable ISA Unit trusts Shares Bonds Life products PEP TESSA VCT EIS EDUCATIONEDUCATION Stake- holder pension Banking account Child Trust Fund Parental contributions Savings Gateway A Framework for Organising and Encouraging Lifetime Savings Mini-cash ISA Banking account Short Term Saving Section National Savings Medium Term Investment Section Gifts Incentive at age 18 Earnings

LifeSaver Retirement Section – locked until retirement Child Section Child ISA Legend Tax free Taxable ISA Unit trusts Shares Bonds Life products PEP TESSA VCT EIS EDUCATIONEDUCATION Stake- holder pension Banking account Child Trust Fund Parental contributions Savings Gateway A Framework for Organising and Encouraging Lifetime Savings Mini-cash ISA Banking account Short Term Saving Section National Savings Medium Term Investment Section Gifts NEW FIXED TERM ISA 20% incentive + extra over time Incentive at age 18 Earnings

LifeSaver Retirement Section – locked until retirement Child Section Child ISA Legend Tax free Taxable ISA Unit trusts Shares Bonds Life products Stakeholder Other pensions PEP TESSA VCT EIS EDUCATIONEDUCATION Stake- holder pension Banking account Child Trust Fund Parental contributions Savings Gateway A Framework for Organising and Encouraging Lifetime Savings 40% or 50% incentive Mini-cash ISA Banking account Short Term Saving Section National Savings Medium Term Investment Section Gifts NEW FIXED TERM ISA 20% incentive + extra over time Incentive at age 18 Earnings

LifeSaver Retirement Section – locked until retirement Child Section Child ISA Legend Tax free Taxable 40% or 50% incentive ISA Unit trusts Shares Bonds Life products Stakeholder Other pensions PEP TESSA VCT EIS EDUCATIONEDUCATION Stake- holder pension Banking account Child Trust Fund Parental contributions Savings GatewayEarnings Pension contributions A Framework for Organising and Encouraging Lifetime Savings Mini-cash ISA Banking account Short Term Saving Section National Savings Medium Term Investment Section GiftsInheritances NEW FIXED TERM ISA 20% incentive + extra over time Incentive at age 18

LifeSaver Retirement Section – locked until retirement Child Section Direct debitsCredit card debtEducational feesEmergency loans Child ISA Legend Tax free Taxable 40% or 50% incentive ISA Unit trusts Shares Bonds Life products Stakeholder Other pensions PEP TESSA VCT EIS EDUCATIONEDUCATION Stake- holder pension Banking account Child Trust Fund Parental contributions Savings GatewayEarnings Pension contributions A Framework for Organising and Encouraging Lifetime Savings Mini-cash ISA Banking account Short Term Saving Section National Savings Medium Term Investment Section GiftsInheritances Life/health insurance NEW FIXED TERM ISA 20% incentive + extra over time Incentive at age 18

equity release LifeSaver Retirement Section – locked until retirement Child Section Direct debits Credit card debt Educational fees Emergency loans Mortgage Child ISA Housing Legend Tax free Taxable 40% or 50% incentive ISA Unit trusts Shares Bonds Life products Stakeholder Other pensions PEP TESSA VCT EIS Tax free lump sum B E Q U E S T S EDUCATIONEDUCATION Stake- holder pension Banking account Child Trust Fund Parental contributions Savings GatewayEarnings Pension contributions A Framework for Organising and Encouraging Lifetime Savings Withdrawals from DC pension 40% tax Long Term Care Mini-cash ISA Banking account Short Term Saving Section National Savings Medium Term Investment Section GiftsInheritances Life/health insurance NEW FIXED TERM ISA 20% incentive + extra over time marginal rate tax Minimum annuity Incentive at age 18

New Government ‘Savings Incentive’ Some suggested limits to discuss Withdrawable ISA - up to £2,000pa no tax on withdrawal Fixed term ISAup to £5,000pa20% + more over time Pension first £1,50050% next £1,50040% next £3,00030% next £20,00025% next £70,00020% above £96,0000% Taxed on withdrawal, growth tax free

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