Rethinking retirement saving incentives Michael Johnson Research Fellow, Centre for Policy Studies .
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Transcript of Rethinking retirement saving incentives Michael Johnson Research Fellow, Centre for Policy Studies .
Rethinking retirement saving incentives
Michael JohnsonResearch Fellow, Centre for Policy Studies
www.cps.org.uk
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Central projection for PSND to GDP (%)
* OBR’s Fiscal Sustainability Report July 2013 ** OBR’s Fiscal Sustainability Report July 2014
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1970 1980 1990 2000 2010 2020 2030 2040 2050 2060
99% in 2062 - 63
66% low (mid 2030’s)
Ratio excludingimpact of ageing population (approx.)
53% low
84% in 2063 - 64
OBR’s
FSR
July
2013
OBR’s
FSR
July
2014
PSND, £ bn. 2013 2014April – August £42.8 £45.4
3
We face a personal debt crisis
Source: Bank of England
* Incl. credit cards, motor and retail finance deals, overdrafts and unsecured loans
MortgagesConsumer
credit * TotalPersonal debt £1,280 billion £159 billion £1,439 billion
Average debt per household £48,454 £6,018 £54,472
Average debt per adult £25,505 £3,168 £28,673
Interest paid per household - - £2,242
Savings (2012) and demographics
Population aged 65+
UK Japan1950 10.7% 4.9%2010 16.5% 22.6% 2050 22.9% 37.8%
OECD; National Accounts at a glance 2014. Definition for HNSR: the ratio of household saving (plus the change in net equity of households in pension funds) to household disposable income.
Household net Net debt
saving rate as % GDP
Greece -14.6% 102%Japan 0.8% 140%
United Kingdom 2.4% 69%Italy 3.6% 113%
Netherlands 4.1% 42%Spain 4.4% 60%
Canada 5.0% 59%Ireland 5.2% 83%
United States 5.8% 100%Norway 8.2% -167%
Germany 10.3% 50%Australia 10.4% 27%
France 11.7% 70%Sweden 12.2% -24%
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Ageing population / fewer workers per pensioner
+ Stagnant productivity growth
+ Rising interest rates (2015+ ?)
= Fiscal squeeze
+ Approaching saving tipping point
= Diminishing supply of domestic capital
Cost of capital to rise
We need a savings culture……but……
The squeeze is on
Retirement saving: contributions, £ bn.
Employers Employees Assets
Occupational £64.1 £14.4
Personal £9.9 £7.7
SIPP & SSAS - £6.0 c. £100
£74.0 + £28.1 = £102.1 £2.1 trillion
c. £2,000
Personal pensions
Stocks & shares ISA
ISA market value
2007-08 £10.2 £10.4 £1462008-09 £9.0 £9.7 £1162009-10 £7.8 £12.5 £1742010-11 £7.7 £15.5 £1832011-12 £8.7 £15.6 £1892012-13 £7.7 £16.5 £222
Subscriptions
(+ £220 Cash ISA)
Tax relief, 2012-13, £ billion
£270 billion of cash since 2001-02
HMRC; Table PEN 6: Cost of Registered Pension Scheme Tax Relief, February 2014
Up-front tax relief on employer contributions £21.3Up-front tax relief on employee contributions £6.7
Tax-exempt 25% lump sum at retirement (approx.) £4.0NICs relief £15.2
Untaxed pension products' income £6.9Total £54.1
less pensioner income tax £11.5= net cost to HMT £42.6
Not deferred tax !
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Not deferred tax: many 40%ers only pay 15% i/c tax…..
.......and decades later
Tax relief: inequitable distribution
Income tax is progressive..
…..so tax relief is regressive
Income decile
% of total tax relief
Corresponding annual income*
Bottom 1%2 1%3 1% < £23k4 2%5 3%6 4%7 6% £23k8 8% to £45k9 17%
Top 58% > £45kTop 1% 30% > £100k
Top 0.5% 22% > £150k* approx
HMRC; Personal Incomes Statistics 2011-12, January 2014
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Behavioural considerations: Denmark
DKr1 of gov’t spend raised total household saving by DKr0.01
Tax relief ineffective in increasing the nation’s savings
Q: Is UK very different?
Active savers (15%) Passive savers (85%)
Behavioural driver
Save anyway: alert to seizing tax incentives
Automatic (default) policies harnessing inertia: AE
Impact on total h/hold saving
Minimal increase: savings reallocated
Significant increase
Cost: Huge per capita Small
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Tax relief: policy options
• Recent
• AA: £255k…….£50k…...£40k….?
• LTA: £1.8m….£1.5m ….£1.25m…..?
• 25% tax-free lump sum?
Savings
2012-13 £2.3 bn
2013-14 £4.4 bn
Post-tax £ tax reliefFlat rate contribution from HMT Pot total Communication33.3% £100 £50.0 £150.0 £2 for £1 “free”30% £100 £42.9 £142.9 £7 for £3 “free”25% £100 £33.3 £133.3 £3 for £1 “free”20% £100 £25.0 £125.0 £4 for £1 “free”
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• Scrap all tax relief 50p per £1 subscribed
• Independent of taxpaying status
• Max. £4,000 from HMT: focused on first £8,000 savings
• Simple…… and highly redistributive
Tax relief: proposals to boost effectiveness*
* Retirement saving incentives: the end of tax relief, and a new beginning, MJ, April 2014
• £30,000 annual contributions limit
• 3 quid pro quos:
But……..Generation Y……..
1. Scrap LTA
2. Re-intro 10p rebate on dividends
3. £100k IHT exemption on transfers to pension pots
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• Combine today’s 4 ISAs + CTF
• Cradle (+£500) to grave
• HMT incentive……shared with pension products
• Withdrawal rules: some ready access….to capital only
• Round tripping mitigation
• Tax
• Nudges to promote default-based saving
• Default fund / income accumulation / AE
Time for the Lifetime ISA*
* Introducing the Lifetime ISA, MJ, August 2014
Lifetime ISA vs. pension product
Lifetime ISA Pension products
HMT 50p incentive Yes Yes
Pre-60 access Yes, but first repay 50p per £1 withdrawn
Pre-55: none
60+ access Yes, taxed at marginal rate 55+: tax at marginal rate
Access to capital growth None until age 60, then Pre-55: none& accumulated income taxed at marginal rate 55+: tax at marginal rate
Tax-free 25% lump sum No YesCharge cap on default fund 0.35% p.a. 0.75% p.a.
Interaction with m-t benefits Treated as capital ExemptPart of estate for IHT ? Yes No
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Default fund design: passive
Portfolio turnover
UK Large Cap
Balanced fund
Global Equities
Emerging Markets
Multi- Manager
10% 0.2% 0.1% 0.2% 0.8% 0.3%50% 0.9% 0.5% 0.8% 3.8% 1.3%
100% 1.8% 1.0% 1.7% 7.6% 2.7%200% 3.1% 1.9% 3.0% 11.0% 4.9%
• Costs
Av. annual trading costs 1.25% - 1.40%
Weighted av. TER* 1.56% - 1.66%
≡ 66% of 4.5% equity risk premium
• The tyranny of turnover: performance drag**
c. 3% p.a.
* 1.56% from IMA press release, 27 January 2012, for active retail UK equity funds, 1.66% from Lipper** Data: Frontier Investment Management
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F&C consistency ratio: performance over 3 x 12 months
The IMA’s 12 major market sectors: 1,086 funds (end-Q2, 2014)
Active fund managers: no value-added?
Daniel Kahneman: “there are domains in which expertise is not possible. Stock picking is a good example”
Warren Buffett: “By periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals”
Outcome Luck + Skill "Fail"Top quartile 25 (2.3%) 17 (1.56%) 8 (0.7%) 1,061 (97.7%)
Top half 138 (12.7%) 136 (12.5%) 2 (0.2%) 948 (87.3%)
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• Capital crisis coming
• Tax relief: the lowest hanging, juiciest fruit in Whitehall?
• The Great Trade
• Lifetime ISA to formally bring ISAs into the retirement arena
• Chameleon, with saver in control
• What future private pensions?
Conclusion
Rethinking retirement saving incentives
Michael JohnsonResearch Fellow, Centre for Policy Studies
www.cps.org.uk