Encouraging Savings in the UK A Lifetime Savings Framework The ‘LifeSaver’ 21st January 2002 Dr....
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Transcript of Encouraging Savings in the UK A Lifetime Savings Framework The ‘LifeSaver’ 21st January 2002 Dr....
Encouraging Savings in the UK
A Lifetime Savings FrameworkThe ‘LifeSaver’
21st January 2002
Dr. Ros [email protected]
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 £12,280.47
(+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
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
EDUCATION
A Framework for Organising and Encouraging Lifetime Savings
LifeSaver
Retirement Section – locked until retirement
ChildSectionE
DUCATION
A Framework for Organising and Encouraging Lifetime Savings
Short Term Saving Section
Medium Term Investment Section
LifeSaver
ChildSection
Retirement Section – locked until retirement
EDUCATION
A Framework for Organising and Encouraging Lifetime Savings
Short Term Saving Section
Medium Term Investment Section
LifeSaver
Retirement Section – locked until retirement
ChildSection
ChildISA
Legend
Tax free
Taxable
EDUCATION
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
ChildSection
ChildISA
Legend
Tax free
Taxable
EDUCATION
Stake-holder
pension
Bankingaccount
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
ChildSection
ChildISA
Legend
Tax free
Taxable
EDUCATION
Stake-holder
pension
Bankingaccount
Child Trust Fund
Parental contributions
Savings Gateway
A Framework for Organising and Encouraging Lifetime Savings
Incentive at age 18
Mini-cashISA
Bankingaccount
Short Term Saving Section
Medium Term Investment Section
Gifts
Earnings
LifeSaver
Retirement Section – locked until retirement
ChildSection
ChildISA
Legend
Tax free
Taxable
ISAUnit trusts
SharesBonds
Lifeproducts
PEPTESSA
VCTEIS
EDUCATION
Stake-holder
pension
Bankingaccount
Child Trust Fund
Parental contributions
Savings Gateway
A Framework for Organising and Encouraging Lifetime Savings
Mini-cashISA
Bankingaccount
Short Term Saving Section
NationalSavings
Medium Term Investment Section
Gifts Incentive at age 18
Earnings
LifeSaver
Retirement Section – locked until retirement
ChildSection
ChildISA
Legend
Tax free
Taxable
ISAUnit trusts
SharesBonds
Lifeproducts
PEPTESSA
VCTEIS
EDUCATION
Stake-holder
pension
Bankingaccount
Child Trust Fund
Parental contributions
Savings Gateway
A Framework for Organising and Encouraging Lifetime Savings
Mini-cashISA
Bankingaccount
Short Term Saving Section
NationalSavings
Medium Term Investment Section
Gifts
NEWFIXEDTERM
ISA
20% incentive +extra over time
Incentive at age 18
Earnings
LifeSaver
Retirement Section – locked until retirement
ChildSection
ChildISA
Legend
Tax free
Taxable
ISAUnit trusts
SharesBonds
Lifeproducts
StakeholderOther
pensions
PEPTESSA
VCTEIS
EDUCATION
Stake-holder
pension
Bankingaccount
Child Trust Fund
Parental contributions
Savings Gateway
A Framework for Organising and Encouraging Lifetime Savings
40% or 50% incentive
Mini-cashISA
Bankingaccount
Short Term Saving Section
NationalSavings
Medium Term Investment Section
Gifts
NEWFIXEDTERM
ISA
20% incentive +extra over time
Incentive at age 18
Earnings
LifeSaver
Retirement Section – locked until retirement
ChildSection
ChildISA
Legend
Tax free
Taxable
40% or 50% incentive
ISAUnit trusts
SharesBonds
Lifeproducts
StakeholderOther
pensions
PEPTESSA
VCTEIS
EDUCATION
Stake-holder
pension
Bankingaccount
Child Trust Fund
Parental contributions
Savings Gateway
Earnings
Pensioncontributions
A Framework for Organising and Encouraging Lifetime Savings
Mini-cashISA
Bankingaccount
Short Term Saving Section
NationalSavings
Medium Term Investment Section
Gifts
Inheritances
NEWFIXEDTERM
ISA
20% incentive +extra over time
Incentive at age 18
LifeSaver
Retirement Section – locked until retirement
ChildSection
Direct debits
Credit card debt
Educational fees
Emergency loans
ChildISA
Legend
Tax free
Taxable
40% or 50% incentive
ISAUnit trusts
SharesBonds
Lifeproducts
StakeholderOther
pensions
PEPTESSA
VCTEIS
EDUCATION
Stake-holder
pension
Bankingaccount
Child Trust Fund
Parental contributions
Savings Gateway
Earnings
Pensioncontributions
A Framework for Organising and Encouraging Lifetime Savings
Mini-cashISA
Bankingaccount
Short Term Saving Section
NationalSavings
Medium Term Investment Section
Gifts
Inheritances
Life/health insurance
NEWFIXEDTERM
ISA
20% incentive +extra over time
Incentive at age 18
equityrelease
LifeSaver
Retirement Section – locked until retirement
ChildSection
Direct debits
Credit card debt
Educational fees
Emergency loans
Mortgage
ChildISA
Housing
Legend
Tax free
Taxable
40% or 50% incentive
ISAUnit trusts
SharesBonds
Lifeproducts
StakeholderOther
pensions
PEPTESSA
VCTEIS
Tax free lump sum
B E Q U E S T S
EDUCATION
Stake-holder
pension
Bankingaccount
Child Trust Fund
Parental contributions
Savings Gateway
Earnings
Pensioncontributions
A Framework for Organising and Encouraging Lifetime Savings
Withdrawals fromDC pension
40% tax
Long TermCare
Mini-cashISA
Bankingaccount
Short Term Saving Section
NationalSavings
Medium Term Investment Section
Gifts
Inheritances
Life/health insurance
NEWFIXEDTERM
ISA
20% incentive +extra over time
marginal rate tax
Minimumannuity
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 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
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