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Category — Savers and Savings Policy

Government must help savers – bring back guaranteed high interest bonds

9 August 2016

  • Monetary policy is not helping ordinary people and low rates may be doing more harm than good
  • Ordinary savers are being hung out to dry and pension problems have worsened
  • Government should issue more high interest 65+ guaranteed growth bonds – but for all age groups

The latest decision by the Bank of England to cut base rate from 0.5% to 0.25%, as well as expanding Quantitative Easing by £60billion, is supposedly designed to boost the economy.  But millions of savers and pensioners are suffering serious potential income shortfalls as a result of this policy.

I believe the damaging side-effects of low interest rates have been under-estimated.  Not only are significant sections of the population being hit near-term, the consequences for the medium and longer term are also negative.

Bring back special savers’ bonds:   As the banks no longer want or need ordinary savers’ money, the Government could offer better interest rates directly.  Bringing back the special savings bonds that were issued from January to May 2015 for the over 65s, but this time for all age groups, would prove popular.  They had market-beating interest rates of 2.5% or 4% and were the most successful financial product for years.  A new issue of such bonds, but not just limited to older savers would reward savers for setting money aside.  This is vital if we are to sustain a savings culture in this country.  Until a few weeks ago, the Bank of England had been suggesting the next move in rates would be upwards – signalling some relief for savers after years of misery.  Now that rates have fallen even further instead, the authorities need to consider the impact on prudent people who want to provide for their own future.  The Government also needs to consider how to help companies that are struggling with rising pension deficits.  Issuing special bonds for pension funds, offering to underpin investments in infrastructure and housing, would be direct ways of helping alleviate the damage of monetary measures.  The Government needs to find ways to offset the negative side-effects of the Bank of England’s latest moves.

What is the damage to savers?  With interest rates staying so low for so long, and rates continually falling further, savings incentives and savers’ incomes across the economy are being destroyed.  This has two damaging consequences which could actually weaken economic growth.

Lower savings income means savers save less and spend less:  Firstly, many people who have saved over the years for their future are facing further income falls.  This may cause them to cut spending, especially if they are in retirement and cannot see a way for their income to increase in future.  Indeed, many savings account interest rates are being reduced by more than the 0.25% rate cut.  Banks and building societies do not need to attract savers now, as the Bank of England’s decision to introduce its new Term Funding Scheme gives the banks cheap money directly from the Bank of England instead.

Destroying saving incentives for younger generations:  Secondly, many people are deciding it is not worth bothering to save as the returns are so tiny.  People who might have saved but decide not to bother will be poorer in future.  Young people are losing the savings culture that the current older generations often grew up with.  Modern societies still need savers, especially as life expectancy increases and the population is aging rapidly.  This lack of savings, and potentially higher borrowing risks damaging growth in future.

What is the damage to pensions?  Again there are two damaging consequences for pensions, both of which are likely to weaken growth.

Rising annuity costs means less pension for life:  Firstly, as interest rates are pushed lower, the costs of buying an annuity have soared.  People looking to lock into a guaranteed lifetime income will be offered much less pension than ever before.  Even if the value of their pension fund has increase a bit, the cost of annuities has usually risen by much more.  And, of course, once they lock into an annuity for life their income will never recover, even if rates rise in future.  So pensioners will have less money to spend, which is hardly an expansionary policy.

Pension deficits weaken company growth prospects and reduce pension contributions for younger workers:  Secondly, employers who are running final salary-type Defined Benefit pension schemes are facing much higher deficits as a result of the expansion of QE.  As gilt yields fall further, employer pension liabilities have soared.  Just today, the Pension Protection Fund PPF7800 index announced that its measure of pension deficits rose last month to around £400billion.  It will rise further this month as a result of the extra QE.  This will weaken the employers sponsoring such pension schemes, damaging their business prospects, potentially preventing them from investing or borrowing to fund growth and sapping corporate resources away from both their business and employment expansion.  As most private sector final salary-type schemes are now closed, the rising deficits are likely to mean employers have less money to spend on providing good pension contributions for those workers who do not belong to these schemes, – usually younger employees.

Monetary policy is too focussed on financial institutions and borrowing:  Monetary policy seems to be overlooking the negative consequences on households (and parts of the corporate sector).

Low rates do not necessarily help mortgage holders and QE has led to rising rental costs:  Typically, if short-term interest rates fall, borrowers’ incomes increase, and they are expected to spend more (or even borrow more to finance extra spending).  However, falling base rates may not help borrowers as much as expected.  Mortgage payments are a major element of household borrowing, but around half of mortgages are on fixed rates, so they do not benefit from the base rate cut to 0.25%.  Indeed, the other element of monetary policy – QE – has damaged especially younger people because it has caused rising property prices.  Ordinary people have to either take out a much larger mortgage to get on the housing ladder, or must pay much more in rent.  So monetary policy has made them worse off.

The Government could help offset damaging impacts of monetary measures:  Because these changes in Bank of England policy have many potentially harmful side-effects, the latest loosening of monetary policy may need to be offset by fiscal measures.   Certainly, the transmission mechanisms of lower interest rates are very indirect – relying on sellers of bonds to boost asset prices or stimulate extra borrowing.  More direct help is likely to have a better outcome.  The indirect stimulus cannot be relied upon to prevent an economic slowdown, while direct measures to increase household incomes and spending, as well as helping offset the effects of rising pension deficits, will be more beneficial to the British people.

August 9, 2016   1 Comment

An opportunity for me to help millions of ordinary British savers

19 April 2015

  • Review of financial fairness and extending financial guidance to younger savers
  • Minister for financial consumer protection and financial education

For so many years I have been an independent consumer champion, working on making finance work better for customers, exposing injustice and helping ordinary savers understand finance.  I have focused on policy, rather than politics, trying to make finance work well for the many, not just the few.  I have worked with all the major political parties and have maintained my neutrality but I want to let you know that I have now decided that the best way to achieve what customers need is to become more directly involved.

The following is from the Prime Minister’s official release:

“Ros Altmann to be a Minister in the next Conservative government – leading a review of financial consumer protection and financial education

Today the Prime Minister is announcing that consumer champion and pensions expert Dr. Ros Altmann is to be nominated as a Conservative peer and will be appointed as a Minister with responsibility for financial consumer protection and financial education in a Conservative government.

Improving dignity and security in retirement for working people lies at the heart of the Conservatives’ long-term economic plan.

Following the biggest pension reforms in a generation, one of her first roles will be to lead a review of financial fairness for consumers.

The Prime Minister said:

“What we’re doing is taking the country’s leading expert on pensions, on savings, on financial education, Ros Altmann, and saying that if we’re re-elected, she’ll be at the heart of government, making sure we complete this great revolution where we’re giving people much more power to save, to access their pension, to pass their pension on to their children, because we want to create a real savings culture in our country for everybody. Not for the rich at the top, but for everybody who saves or has a pension.”


So, I will have the chance to work from inside Government, in a Ministerial role that will straddle both the Treasury and the DWP, on consumer protection, financial fairness and financial education.  I believe that working in both Departments is important in order to have joined-up policy.

Following on from the pensions and savings reforms introduced in the past year, it is so important to ensure that customers are treated fairly by the large financial companies. I also believe it is vital to roll out financial education to everyone, not just those nearing the end of their working life.

I will carry out a major review of financial fairness for consumers, including:

  • charge caps for pension products to protect savers from excessive fees;
  • improved rights for older consumers especially in the mortgage market;
  • promoting competition and innovation for all savers;
  • developing the Pension Wise service to offer financial education and guidance to working people at every stage of their lives – not just nearer retirement

I do passionately believe the new pension reforms – and trusting people with their own money – are an essential step to helping everyone make the most of their hard-earned savings.  For too many years, consumer rights have played second fiddle to the interests of large financial firms, but the new pension freedoms show that the Conservatives have put the interests of British savers first and that is a real game-changer.

In the 2014 Budget, they stood up to the large companies who had too often taken advantage of their customers and have paved the way for a new environment for long-term savings, which does not force people into buying products that may not be suitable for their needs. They have created the opportunity for working families to save more if and when they can, knowing they will be allowed to use the money as best fits their circumstances.

There are some who say only the financial industry, or Government, know best what people should do with their money and that most people can’t make sensible decisions for themselves. Well, I disagree. Yes, some may be reckless but I truly believe most British savers will be responsible and can be trusted to make the right choices. They will need protection, they will need guidance and many will also need advice, but that is where I hope I can make a difference.

It will be my job to review this and ensure customers get a fair deal – I am delighted to be offered the chance to do so.

I want to see long-term savings work better for ordinary families who put their hard-earned savings aside for their future, which is so important to restoring the strong British savings culture. Those with the largest pension savings already had the freedoms and flexibility that are now open to everyone, but of course we must ensure financial services firms move with the times.  This will mean a new mindset from providers and potentially further Government action to protect savers better.

Of course it won’t be easy, but I’m determined to make a difference. I will remain a champion for consumers, but also want to work with the industry to adapt to the new environment. I can do this far more effectively from within Government than as an independent outsider.

I will also continue to champion the need for fairness and inclusiveness for women and for customers of all ages – which is where I believe financial education and guidance can be particularly powerful.

The savings and pension reforms are only a start, the next steps are yet to come. Making financial services work better for the customers they are trying to serve will ultimately also benefit the industry itself. We have strong, vibrant financial firms who are world leaders, but their long-term success will require a new approach. Modernising and adapting are vital. Some are already recognising this and I look forward to engaging constructively with them. Too many, however, are still relying on past captive customers being locked into expensive, inflexible products. Such practices need to be abandoned, in favour of more customer-friendly approaches, that will bring far more money into long-term savings in future.

I hope to help this happen.

April 19, 2015   1 Comment

A Savings Revolution to follow the Pensions Revolution

18 March 2015

We had the Pensions Revolution last year, now comes the Savings Revolution

  • 95% of savers will pay no tax on their savings – will be popular
  • 5m will be allowed to sell their annuity – that’s great news
  • But cutting Lifetime Allowance for pensions is really bad policy
  • Lifetime limit should only apply to DB, but abolished for DC

So there we have it.  The last Budget before the General Election.  A mix of moves to please as many of the electorate as possible, but without committing massive amounts of extra spending.  There is help for savers, help for first-time housebuyers, but nothing to help with the social care crisis.

The main news this time is the help for savers.  This is unquestionably good news for ordinary savers with 17million people benefiting from the decision to scrap basic rate tax on the first £1000 of savings income each year.  This will be popular, as 95% of savers will not pay any tax on their savings income.  Savers have paid tax on their income when they earned the money, so allowing them to earn interest on it free of tax makes sense.

What might this mean for savers?

People with £50,000 savings may not pay any income tax on their savings:  If we assume savers earn 2% interest on their money, then they can have £50,000 in a savings account and will still pay no tax on their income from those savings.  Even if they earn 4% interest (those days seem like a distant memory but who knows they may return) then someone with £25,000 of savings would still pay not tax on their interest.

Non-taxpayers won’t have to reclaim the 20% tax deducted from their income:  At the moment, banks and building societies have to deduct 20% tax from all interest income before it is paid out and non-taxpayers have to reclaim the tax withheld.  In many cases, this money is never actually claimed as the recipients do not know they have to do so.  Pensioners are one of the groups least likely to reclaim the tax, so this will be of benefit to them.

Higher rate taxpayers will have to pay the additional tax above basic rate and the top 5% of savers will still be able to shelter money in ISAs to receive tax free savings income.

ISA savings will also become more flexible:  At the moment, if you invest the full £15,240 into an ISA at the start of the year and then take some money out, you cannot put more back again that year.  In future, the Government plans to allow you to put money in, then take it out again if you need to and reinvest back up to the full annual ISA allowance later in the same tax year.  It is not clear how this will be tracked and I can foresee some administration issues, but the principle is a good one.

So what about pensions – some good news, some not good news:  After last year’s bombshell, we could not possibly expect a similar scale of change.  Building on the pensions revolution started in last year’s Budget, the Chancellor wants to extend the new idea of freedom and choice much more widely.  However, to pay for the giveaway to savers, the lifetime limit on pensions has been cut sharply again.

Undoing unwanted annuities:  The pensions revolution that proved so popular last year has been extended to try to include those who had already bought annuities before the rules forcing most pension savers to buy annuities were scrapped.  The Chancellor intends to offer those who were previously forced to lock their pension funds into irreversible annuities, the chance to sell them again.  Many never actually wanted, to annuitise or bought unsuitable products and understandably felt most aggrieved that future pension savers had freedoms they were denied.  So a consultation has been launched that proposes allowing people to sell their annuities.  They will receive a cash lump sum that they can either spend – but will be taxed on as income – or can reinvest into a pension drawdown fund and then only pay tax when they withdraw their money.  This is a fair and sensible policy.

Regulatory protection and advice crucial:  Of course there are dangers that people will be ripped off if companies buying their annuities offer a poor deal.  Many annuitants paid high charges when buying the annuity in the first place or received poor value, so that would be adding insult to injury.  Therefore, we need careful regulatory oversight of the second-hand annuity market, perhaps with controls on charges and making sure people get proper independent advice before trading in their annuity.  The Pension Wise guidance service is likely to be extended to offer help and information with the decision, but advice and regulatory protection are really needed.  Of course, nobody will be forced to sell their annuity.  It will be their choice, but one which they would not otherwise have.

There are circumstances in which allowing people to sell their annuity will be sensible: Those with small pension funds and plenty of other retirement income may welcome the chance to take the cash for urgent expenses or debt repayment.  Others may need to provide a pension for a partner which was not included in their annuity.  Those with guaranteed annuity rates that only offered single life products will have a chance to cover their partner and those who prefer to leave their pension money invested for a few more years will be able to do so, whereas under the old rules they would have needed huge sums (around £100,000 or more) to be able to use drawdown.  Controls on charges or other customer protection might be needed, but at least people will not be stuck for life in an unsuitable product.

However, the other big change to pensions is far less welcome:  Cutting the lifetime limit from £1.25m to £1m is very disappointing.  Indeed, in 2014 the lifetime limit was still £1.5m, it is now £1.25m and cutting it down to £1m is a draconian change.  Cutting the lifetime allowance so sharply makes it much harder for people to plan their pension savings over the long-term.  This is expected to raise £600m in extra tax revenue and will hit many people in final salary or defined benefit pension schemes, as well as those in defined contribution pensions.  The Government suggests that only around 4% of pension pots are above £1million and that it will offer protection for those already near or over the limit, however it is really a shame that this policy has been introduced.

Lowering LTA adds more complexity and penalises investment success – both are bad for pensions: Firstly, it makes pensions still more complicated by adding yet another layer of protection into the rules.  Secondly, it is a penalty on investment success.  Surely the point of pension saving is to benefit from long-term investment returns.  That means it makes sense to limit the amount people can put in with the help of tax relief, but does not make sense to then try to punish them if their fund grows sharply.

Lifetime limit far more generous for DB schemes than DC:  The lifetime limit of £1m will allow members of defined benefit (final salary/career average) schemes to have a pension of up to £50,000 a year within the limit.  However, members of defined contribution pension schemes (which is the  majority of workers outside the public sector) could only buy a pension worth around £25,000 for £1m (with inflation linking and spouse protection), so the lifetime limit is unfair in this respect due to the calculation methodology of the rules.

A lifetime limit for DB schemes makes more sense, but should be abolished for DC: For members of defined benefit pension schemes, who do not have an actual pot of money but are promised a specific level of pension, perhaps the lifetime limit makes more sense, since they have no control over the investments and the contributions are harder to measure due to fluctuations that occur depending on the scheme’s assessed funding levels.  With defined contribution schemes, the better policy would be to control the amount put in each year but then allow the pot to grow as well as it can, without penalising it if it rises strongly.  Therefore, I would like to see the Lifetime allowance abolished for DC schemes.

Nothing for long-term care:  It is disappointing that there are no new measures to help or encourage or incentivise people to put money aside for funding long-term care needs.  Families are not prepared for care, nor is the Government, yet there is a crisis looming which could eat up the resources of many families who might have been able to put some funds away if they had known about it – and could also bankrupt the NHS.  The next Government will have to get to grips with this crisis urgently, time is running out.

Help for younger first time housebuyers with a pension-style ISA plan:  The new ‘HelptoBuySA’ effectively turns the savings of young people preparing for their first house purchase into house pension plans, by offering the equivalent of basic rate tax relief on their savings.  If they need a house deposit of £15,000 for their first home, they will only need to actually save £12,000 and the Government adds the additional £3,000 they require.

March 18, 2015   2 Comments

The pensions revolution – what does it mean?

30 September 2014

So many people have been asking me about the new pension changes and what they might mean, I have put together a quick Q&A to address some of these with my comments.  Hope you find it of interest.  There are profound implications for pension products and pension savers – as well as for regulators of course, to make sure people understand what this all means for them.

  • If in good health, perhaps you shouldn’t buy an annuity before age 75
  • Look for an annuity with guarantees or value protection
  • Pensions have become the most attractive form of savings
  • This benefits ordinary savers, not just the wealthy
  • More money will go into pensions
  • ISAs may switch to pensions
  • More money will stay in pensions
  • Auto-enrolment more attractive than before
  • Pensions can pass down the generations
  • Guidance must explain the tax benefits and signpost to advice
  • FCA must ensure customers are properly protected

The latest announcement of tax free inheritance for pensions, on top of the Budget reforms already announced, will have profound implications for the future of UK private pensions.  It is not putting it too strongly to say that there is a totally different outlook for pension savers in future.  This has implications for millions of us, young or older, and it is vital that the new environment is properly explained and understood.  So much change has happened which runs entirely contrary to decades of traditional UK pensions thinking that many will find it hard to get their head around the new landscape.  Here is quick Q&A to start the ball rolling and hopefully help you appreciate what this might mean going forward.

1.        Will these reforms make pensions more attractive?

Unquestionably yes.  Pensions are the most tax-favoured and attractive long-term savings vehicle for almost all of us.  You could say pensions have become sexy – even exciting!  With the new freedom and flexibility, you can save in a pension fund, get tax relief at your top marginal rate, all gains you make are tax free and then any money you don’t use from your fund while you are alive will go tax-free to the next generation.  Even your own home suffers inheritance tax, but your pension passes on tax free.

2.       Do the reforms just benefit the wealthy?

Absolutely not.  In fact, that’s part of the beauty of the new landscape.  Pensions are now good for the average earners who can enjoy the kind of freedom and flexibility that used to only apply to the very wealthiest.  If you had huge sums in a pension fund before, you did not need to buy an annuity or be limited by capped drawdown, you could use flexible drawdown to take money whenever you wanted, and you could afford not to touch the fund before age 75 so it would pass on tax free to the next generation.  Those who had smaller amounts were denied these freedoms but in future they will be available to all.  Whether your pension fund is large or small, the Government will not restrict what you can do once you reach age 55 and everyone under 75 can pass on the funds totally free of tax, while everyone over 75 can pass on unused funds to give pensions for the next generation – which will be tax free until they are drawn down and face marginal income tax rates.  This ensures many of the advantages that the wealthiest had can now be enjoyed by every pension saver (assuming their pension company allows them to!)

3.        Does this have implications for auto-enrolment?

Yes, huge implications.  The reforms are likely to mean many more people will stay auto-enrolled and opt out rates should be dramatically lower than previously expected.  It also means we should think about auto-enrolling those earning under £10,000 as well, because they are most likely to need the extra savings. As pensions are now so much more flexible and suitable for savers, with the best tax advantages, the reforms make auto-enrolment a ‘must-have’ for many more workers.  This is likely to mean higher costs to both employers and the Exchequer than previously forecast.  Auto-enrolment is a ‘buy one get one free’ offer.  Each £1 the worker contributes immediately doubles to £2 in their pension – due to the employer contribution and tax relief. This is far more powerful than even higher rate tax relief.

4.        What does this mean for annuities?

There are several implications for annuities of the new pension landscape.

·         More annuities with guarantees, so money can pass on tax free on early death

·         More annuities with value protection, as previous sales were hampered by the 55% death tax

·         People who are in good health should perhaps delay annuity purchase to age 75

·         Standard annuity sales will fall sharply – more impaired or underwritten annuities.

Annuity sales should fall sharply, many will be better to wait till age 75 and the providers will need to offer more guarantees or value protection.  Clearly, the reforms will mean the sale of standard annuities, that has dominated the Defined Contribution pensions market for many years, should decline sharply.  This is long overdue.  Annuities have been sold to people who should never have bought them, or who bought the wrong type of product and the Regulator failed to protect customers properly.  The tax system now favours income drawdown and, because of the tax advantages of inheriting pension funds if the saver dies before age 75, there will be a real incentive to delay annuitising until later ages.

5.        Won’t people just rush out and spend all the money as soon as they can get their hands on it?

Of course, there is that risk, but firstly I trust people who have been responsible enough to save for their retirement to be responsible enough to manage their funds in later life too.  Secondly, with the latest announcement of the scrapping of the 55% inherited pensions tax, there is a real incentive now for people to leave their money inside their pension fund for as long as possible.  While any funds passed on were taxed at the penal 55% rate, there was a penalty on keeping money in pensions.  Now, in contrast, there is a real reason to hang onto your pension money as long as you can.  It grows tax free while in the pension, it’s there if you need it, but if you don’t spend it can pass on tax free.

6.        Are there implications for care funding?

Yes, there is now a much more realistic chance that pension funds can help pay for later life care needs, for which no funding has been put in place and which many more people will require.  There is a looming crisis in the funding of elderly care, with neither the state, nor the private sector having prepared for this adequately.  These pension reforms could kick-start care funding by encouraging people to leave money in their pension funds and then, if they need care, they have the money to pay for it.  The state will not pay and cannot pay for all.

7.        Does this have implications for ISAs?

Actually yes.  The fact that pensions have become so much more tax favoured now suggests many people could benefit from switching ISAs into pensions.  The ISA is not free of inheritance tax, it does not get tax relief up front, there is normally no employer contribution and the freedom to spend ISAs has now been at least partially extended to pensions.

8.       Will this benefit families?

Yes, this new pensions landscape means people can pass their pensions onto their loved ones and pension savers will know that their hard earned savings can benefit the next generation if they don’t need or use that money themselves.  The Government is providing real incentives for people to help their children and grandchildren and improve inter generational wealth sharing.  The old system would see insurance companies pocketing the unused funds of most pension savers.  Now their families can benefit instead.

9.  What does this mean for products?

We will need new types of product – annuities sold from a later age and with more guarantees, so they can be passed on to loved ones.  Different products for accumulating pensions, rather than current lifestyle funds that just assume savers will buy an annuity at a preset age.  The default will be drawdown, or keeping money invested in the pension fund, rather than buying an annuity so providers need to help savers with better returns for longer periods of time.

10.  What about the implications for guidance and regulation?

The new landscape makes guidance even more important than ever.  Explaining the tax implications of the pension saving, the implications of taking money out too soon, the tax benefits on death, the benefits of doing nothing and of leaving money invested if still working will all need to be understood.  The guidance should signpost people to full advice too.  In addition, the Regulator must make sure that customers are properly protected.  These reforms are great, but only if people can take advantage of them.  Providers must not be allowed to mislead customers into buying unsuitable products, as has too often been the case in the past.

September 30, 2014   4 Comments

Do we need a Lifetime ISA now that pensions coverage is set to rise?

Lifetime ISA might have been useful in the past but is not necessary now

Pensions auto-enrolment and flexibility will increase pension coverage

New ‘Lifetime ISA’ product proposed, to replace pensions and ISAs:  The Centre for Policy Studies is calling for a new savings approach – the Lifetime ISA – to be introduced in the UK.  This would replace the separate ISA and pension systems we currently have.  The idea is unveiled in this paper by Michael Johnson, whose ideas are often worth listening to.  Michael is very well-connected in policy circles and has been working on this for several years.  The proposals are designed to increase savings levels in the UK, following the dramatic decline in long-term savings, particularly among younger workers.

Pensions coverage will start rising again:  It is true that pension coverage has plummeted to record lows in the past few years, and the flexibility of ISAs has proved more popular than inflexible pensions.  However, the policy of auto-enrolment under which every worker is joining an employer pension scheme and the new flexibility for pensions introduced in the recent Budget are likely to increase pension coverage significantly in future.  The success of auto-enrolment, which relies on behavioural economics to ‘nudge’ people into pensions, coupled with increased flexibility, mean the need to join ISAs and pensions together is significantly lower now.

Tax relief replaced by 50p in £ incentive up to £8000 a year:  The proposed Lifetime ISA policy would also mean the end of pensions tax relief, with all savings receiving a 50p in the £ boost from the Exchequer instead (this extra 50p would have to be repaid if money was withdrawn before age 60).  A proposed annual allowance of up to £8000 would benefit from this savings incentive top-up, meaning that higher earners would lose out significantly, while the rest of the population received more incentive.  In social terms, this makes sense, since one would be redistributing the savings incentives from the highest earners, who presumably need less incentive to save, towards the rest of the population, who probably need incentivising more.

Auto-enrolment offers £1 extra for each £1 contributed, funded mostly by the employer:  Tax relief on pensions costs a huge amount – somewhere around £30billion a year – and I suspect the success of auto-enrolment could enable the Treasury to reduce the Exchequer cost of savings incentives in future, while still seeing an increase in pension saving.  Indeed, auto-enrolment represents a far more powerful savings incentive than the proposed 50p in the £ for a Lifetime ISA.  The auto-enrolment minimum contribution levels offer a ‘buy one get one free’ deal, with an extra £1 going into each worker’s pension fund for every £1 they contribute themselves.  Employees put in 4% of their qualifying earnings, the employer contributes a further 3% and 1% more is added by basic rate tax relief, so a 4% contribution immediately doubles to 8%.  It is not clear, therefore, whether a 50p in the £ policy is the necessary.

Pension savings can be increased further by auto-escalation:  Further ‘nudge’ measures could also be introduced to increase pension savings in future. For example, ‘auto-escalation’ which would encourage people to increase their pension contributions beyond the minimum level, by dedicating a portion of any pay rise to increased pension contributions.

I proposed a Lifetime Savings Account (called ‘LifeSaver’) in 2001 but things have moved on now:  Over 10 years ago, I drew up plans for a Lifetime Savings Account, similar to the Lifetime ISA suggestions, which would cater for all a person’s savings needs throughout their lifetime.  This is an example from a Paper published in the Journal of Financial Services . I originally suggested that this should be seeded by the Child Trust Funds, which were the forerunner of Junior ISAs.  The idea was to ensure people would always have a savings account at every stage of their life.  Things have moved on now however.  With auto-enrolment, most people will have a pension account once they start work and will also receive extra money from their employer if they contribute.  Those who do not save in their workplace pension scheme will forego the employer contribution.  The need for a lifetime savings account has therefore diminished and the ability to access pensions flexibly will increase their coverage.

Consider using auto-enrolment for incentivising other types of saving, not just pensions:  However, I do think it worth considering allowing workers to use their savings for purposes other than pensions.  For example, repaying student debts or saving for a house is a socially valid form of saving, but those who cannot afford to fund debt repayments or house purchase as well as pensions will lose their employer contribution.  This seems somewhat unfair.  My suggestion is that anyone who saves will receive an employer contribution, but the worker’s own money could be used for purposes other than pensions, while their employer contribution and the basic rate tax relief stay locked until later life.

This would mean everyone saving for their future in some form, with the help of their employer, rather than only offering employer assistance for a pension product and nothing else.

In summary, I am not convinced that we need a new Lifetime ISA.  I believe pensions coverage will increase significantly as a result of the policy changes already underway.  However, I do believe there is merit in extending the savings incentives to cover other forms of savings beyond just pensions.  Those saving for a house or who want to repay student debts should still receive an employer pension contribution, but this employer money and basic rate tax relief should stay locked until retirement, while the worker can access their own savings if needed.

August 4, 2014   1 Comment

Budget ISA moves – ISA savings for care

21 March 2014

  • Nicer ISA savings – what could be NISA!
  • And how about a Care ISA?

As the dust starts to settle a little following the sudden Budget improvements to Individual Savings Accounts (ISA) rules, I thought it might be helpful to note down some more thoughts.  Wouldn’t it be great if the new found freedoms could be used to help fund social care.

An ISA tax free savings account, designated to pay for care costs, could help with the coming social care crisis and also give families some peace of mind about covering the expense of infirmity in old age.  An added incentive to encourage more people to pre-fund possible care needs – whether for themselves or a loved one – would be to allow any designated care funds to be passed on free of inheritance tax, if not needed for care and kept in a fund that will still be used to fund care needs for other family  members.

This would enable the savings industry to design longer term products to help people save for the possibility of needing care in later life, rather than suddenly finding they need large sums of money which have not been budgeted for.

Three or four years’ worth of ISA savings, of £15,000 a year, would result in a fund that could cover most people’s care costs in later life.  Once care is needed, the fund could then be drawn down slowly, or switched to cash.  I do hope the industry will rise to this challenge now that the Government has opened the door to more flexible savings.

Now that ISAs will be more flexible, with people being allowed to shelter much more income from tax and also free to choose whether they want cash or stocks and shares in their savings fund, the position of savers has been significantly improved.  Whether you have larger or more modest sums to set aside, or perhaps if you receive an inheritance or bonus payment, you will be able to build up more savings over the long-term in a tax-free account.  Young people saving for a house can keep the money in cash, those in retirement who need to live on their savings likewise, but those who have savings for the longer-term will be able to put the money in stocks and shares and then switch into cash as and when they feel it is appropriate for them.   There is not yet any funding vehicle to prepare for care costs, using the new ISA flexibility might just spur the industry to develop some.

March 21, 2014   2 Comments

Pensions and savings revolution! My wishlist comes true

19 March 2014

Unbelievable news – pensions and savings revolution

So much of what I’ve been calling for is suddenly happening – exciting or what?

Pensions and ISAs more flexible, limits more generous – a Tory votewinner

After so many years of waiting for good news, suddenly so much comes at once.  Like the proverbial Number 13 buses, a whole raft of policies has all come at once – and they are good news. It’s also a brilliant Budget for Tory election prospects of course.  The devil of some of this will be in the detail but overall this is just good news all round.  And will even bring in more tax for the Chancellor short-term as pension lump sums will deliver higher tax revenue than taking small amounts of income or delaying annuity purchase.

ISAs now more flexible:  The Chancellor has delivered a Budget for savers, albeit against the backdrop of pitiful interest rates, but allowing a £15,000 ISA limit and all of it in cash, will suddenly increase the interest income that people can earn, since they will no longer be taxed on it.

The Chancellor will finally allow people to choose whether they put all their ISA allowance into cash, or stocks and shares, rather than only being allowed to have half in cash.  You can switch, as you wish, between different investments and will be able to do what’s best for you.  If you are saving for a house deposit, you can put your money into cash and not worry about investment risk.  If you’re retired and trying to live on your savings, again you can shelter more money from tax without being forced to take more investment risk.

First £5,000 of savings interest to be tax free:  Currently, there is a 10% starting rate of tax for very low earners, up to £2880 of income, but that starting rate is now rising to £5,000 and the 10% rate is being cut to zero.  This will help poorer savers and will also be simpler.

Pensions flexibility massively enhanced: There are so many good news aspects for pension savings in this Budget that it is hard to know what to pick out.  The overall message is, pension savings are going to be more flexible at the point of retirement. You will be able to save more into pensions knowing that there will be less restriction on what you can do with the money.

Nobody needs to buy an annuity and before you do, you_ll have to get face to face advice:  All DC pensions look set to be freed from the annuity straitjacket that has so disadvantaged people in the past.  As the Bank of England’s policies have brought long-term rates so low, annuity rates have plunged and people get very poor value from the annuity market.  The FCA recently exposed just how badly some annuity companies are treating customers and I have been campaigning for the changes that have been announced today for years.  The Chancellor now says before buying an annuity people will be entitled to face to face impartial advice.  That will be consulted on, but is so important.  I don’t know if they are frightened of a new mis-selling scandal, like I’ve been warning, but whatever the reason it’s essential that people understand what they are doing before buying an irreversible annuity. 

Taking more pension funds as cash:  Currently anyone with pension savings below £18,000 can take all the money as cash, with a quarter tax free.  In addition, your two pension pots worth under £2000 can be taken as cash but the remainder has to be either annuitised or put into drawdown.  The Chancellor is massively extending these limits, so that anyone with pension savings under £30,000 can take it all as cash and up to three funds below £10,000 can also be cashed in, with tax paid at the marginal rate.

Drawdown enhanced:

1. Minimum income requirement cut to £12,000:  Those who are in income drawdown currently can only take their money without restrictions if they have secured pension income for life worth £20,000 including state pensions.  That limit is now being cut to £12,000 a year income.  Many will be able to achieve that from state pensions plus a bit extra, so they will end up being able to invest in flexible income drawdown and have access to their money.

2.    Capped drawdown limit increased to 150% of GAD rate:  People are currently restricted to taking only a certain amount each year from their pension fund.  This limit is set by the government actuary at 120% of the rate on a single life annuity.  The chancellor is increasing this to 150% (it has only just been raised from 100%) which will be welcome news.  This will also help people in poor health, who currently could get better than standard annuity rates but were penalised by the income drawdown system.

3.   55% penal tax rate on drawdown is being reduced to marginal rate:  Many people have been stung by the tax rate on drawdown being 55% for monies left over, but the Chancellor is cutting that to just the marginal tax rate.  This is far fairer.


Tory vote-winning budget: This is undoubtedly a Budget to boost Tory votes.  Savers and those with good sized pension funds will feel far better off and have been pleading for some help – at last it has arrived.  Even smaller savers are being helped, with higher amounts of pension money being available as cash lump sums for smaller pension funds and with a zero per cent starting rate of tax on savings income, added to which rules for ISAs are becoming far more generous. 

A budget for savers at last!  Well well, who_d have thought an election was coming up next year?  Many of the measures will only start in the run-up to the next election.  A master political strategist has really thrown down the gauntlet now!


March 19, 2014   2 Comments

Budget wishlist for pensions and savings

17 March 2014

A Budget wishlist for pensions and savings

  • Exempt savings interest from tax for two years
  • Or allow full ISA allowance in cash
  • Allow small pension funds to be taken as cash
  • Relax restrictions in capped drawdown to allow for ill-health
  • Introduce new incentives to save for long-term care – ISA savings set aside for care could pass on free of inheritance tax if not spent
  • Stop meddling with pension rules

What might the Chancellor do to address the crisis in our pension system and restore some faith in the value of saving?  After five years of rock-bottom interest rates, as the economy is recovering, will this finally be the Budget that restores some hope to savers?

For the past few years, policy has focused on encouraging more borrowing, increasing bank lending and helping mortgage borrowers, in an effort to revive the economy.

Continued ultra-low interest rates and ever-cheaper mortgages have been great news for the one-third of households who have a mortgage, but the other two thirds have hardly benefited.  Indeed, these policies have left many older people facing plummeting savings income or feeling forced to take on more risk by investing in stocks and bonds, or both. Company pension schemes deficits have risen sharply as low interest rates have taken their toll and anyone buying an annuity has seen a permanent reduction in their income.

Here are some ideas of what the Chancellor could do to help.

  1. Exempt savings income from tax for the next two years:  As interest rates have been kept artificially low, it would be great news for savers if they were allowed to receive their interest income tax-free.  A temporary tax break would cost the Chancellor very little while rates are so low, but would at least give a small boost to savers’ net income.
  2. Relax the restrictions on ISAs:  The Chancellor could allow ISA savers to choose whether to put their whole ISA allowance into cash or stocks and shares, and be able to transfer freely between the two.  Young people saving for a house deposit, or retirees needing to live on their savings, cannot afford to gamble on the markets, but then they can only put half the annual ISA allowance into Cash.  Improving ISA flexibility would help offset at least a small part of the damage done by falling savings interest rates, by enabling savers to receive a bit more income tax-free.
  3. Relax the rules for annuity purchase to allow £10,000 or even £18,000 to be taken as a lump sum:  The financial services regulator, FCA, recently highlighted what terrible value current annuity purchasers often receive and this applies particularly to smaller pension funds.  Currently, unless total pension savings are worth under £18,000, or an individual pension pot is valued below £2,000, the funds have to be turned into an income, which normally means buying an annuity.  However, annuity companies offer very poor value for smaller annuities and if the Chancellor were to allow funds up to, say, £10,000 or even £18,000, to be taken as a taxable lump sum, people would not have to buy an annuity but could invest the money as they wish to.  This would also bring in more revenue to the Exchequer, since many people who receive only a few extra pounds a week from a small annuity will not pay tax on that income, whereas receiving a lump sum may result in pensioners paying basic rate tax on their fund.
  4. Introduce fairer rules for capped income drawdown – particularly to recognise ill-health:  Some form of ‘enhanced’ or ‘impaired life’ drawdown, allowing those with poorer health to withdraw more each year.
  5. Introduce new incentives to help people save for care:  The Chancellor could announce new incentives to help people save for later life care needs.  The numbers needing expensive old age care will grow significantly in future and almost nobody is saving to prepare for this.  A new Care ISA allowance would enable people to save in a tax-free environment to provide for long-term care.  If the ISA could be passed on free of Inheritance Tax if it is not spent on care, then many people might start earmarking their ISA savings for care.  Such an incentive would also help focus people’s attention on the need for care savings.
  6. Stop meddling with pension rules: This could allow some stability for people to plan their later life finances.

The last few years have done dreadful damage to savings incentives.  No economy can survive and thrive without long-term savings and it is important that policymakers encourage more people to save for their own future needs.  Let’s hope this Budget will finally produce some long overdue good news for savers.


March 18, 2014   No Comments

Prolonging the party – who wants rates to rise?

31 January 2014

  • Bank of England statistics confirm bonanza for mortgage holders
  • Mortgage borrowers may be £3,300a year better off and savers over £4000pa worse off
  • Low rates are huge help for mortgagees – no wonder so many don’t want rates to rise

Analysing the Bank of England’s statistics on interest rates in mortgage and savings markets since 2007 shows fascinating results.  The extent of income gains for mortgage borrowers is startling and the losses for savers are significant.  Those with the largest mortgages benefit most, of course, while all savers have lost out as a result of record low rates.

£100,000 tracker or SVR mortgage repayments now c.£3300 a year lower than 2008: A borrower with a £100,000 tracker mortgage have benefited by over £3200 a year extra income as a result of the drop in mortgage rates since end 2007.  Tracker mortgage repayments are £3,280 a year lower and those on Standard Variable Rates are paying £3290 a year less than in December 2007.

Saver with £100,000 is Cash ISA or fixed bond now losing £4,250 or £4,500 income: By contrast, a saver with £100,000 of savings in Cash ISAs or fixed rate bonds is more than £4,000 a year worse off than in December 2007 due to the interest rate falls.  The average Cash ISA in December 2007 paid £5350 a year interest, but by December 2013 it was just £1090 a year – £4260 a year lower.  The average fixed rate bond paid £5990 a year in 2007, but only £1440 a year in December 2013 – a loss of income of £4550.

One third of households with mortgage have had enormous income boost: The huge gains for mortgage holders may help explain the support for low rates that has persisted even in the face of economic recovery. Although only one third of households actually has a mortgage, while the other two thirds either own their home outright or are renting, the interests of those with mortgages have been driving the policy agenda. Those with largest mortgages (middle-aged with more expensive houses particularly in the South East) have a vested interest in opposing rate rises. Meanwhile, savers have little voice or power to alleviate their losses, or are being forced to take much more investment risk.  The Table below summarises the borrowers vs. savers situation

Interest saved on £100,000 mortgage vs. interest lost on £100,000 savings


Annual interest Dec 2007

Annual interest

Dec 2013


Monthly interest Mar 2008

Monthly interest

Dec 2013



£100,000 tracker mortgage




£3280pa gain




£273.33pm gain

£100,000 SVR mortgage









£274.16pm gain




£100,000 savings in Cash ISA











£100,000 savings in fixed rate bonds











Source:  Bank of England statistics, Table G.13

– uses closest comparable figures

January 31, 2014   2 Comments

A wake-up call to embrace benefits of saving and working longer

17 December 2013

  • IFS study is a wake-up call to embrace benefits of saving and working longer
  • Headlines of younger generations being much worse off than previous generations are too negative
  • IFS shows younger cohorts were much better off earlier in their lives but spent rather than saved – as economy picks up they can rethink their lives

IFS report shows lower incomes for younger generations partly result from failure to save:  Today’s IFS report has led to dire warnings that today’s middle aged groups are heading for a poorer retirement than current older citizens.  However, the headlines fail to reflect that much of the reason for this is due to lower savings rates.  Younger generations have saved less and borrowed more than those in or just reaching retirement.  Money spent today will not be there to live on tomorrow, so it should not come as a surprise that their future income and wealth prospects are lower than those who saved more.

Despite higher incomes than previous generations:  Indeed, the report’s findings are even more damning, since they show that those now around their forties actually had much larger incomes than previous generations from which to set aside savings in their early adult years, but they chose not to.  Savings rates declined significantly from the late 1990s as the 1960s and 1970s cohorts failed to take advantage of years of rising income.  By contrast, older generations were more inclined to put money away for the future and avoid too much debt, rather than just live for now.

Earnings growth will recover and today’s forty-somethings have time to improve their position:  Another reason for the failure of middle-aged incomes to keep up with those of people near or newly retiring is the lack of earnings growth in the economy in the past ten years.  Obviously,  periods of economic recession (following the 2000 dot com crash and the 2008 financial crisis) will worsen income prospects, however this is not necessarily a permanent phenomenon.  Earnings will recover at some stage over the next twenty or so years before today’s forty-somethings reach pension age.

Inheritance cannot be relied on due to rising care costs:  In addition to this, the study seems to imply that those who are middle aged now will only be well off in retirement if they inherit wealth from older generations, while those without an inheritance are doomed to be less well off than current cohorts of pensioners.  This analysis is open to question.  In particular, many of today’s older generations will need to spend much of their wealth on long-term care, leaving little for their offspring.

People will not necessarily retire in future as they do now:  In addition, the study implicitly assumes that people will retire around the same age as today’s pensioners.  However, working longer is another solution to this situation.  If today’s younger cohorts plan to keep working later than previous generations, preferably on a part-time basis, they could even end up better off than their parents who stopped work at younger ages.

Early retirement was retrograde step for society as life expectancy increased:  Only a minority of today’s pensioners actually have good final salary pensions.  The majority of pensioners rely heavily on the state pension, which will not provide for a lavish lifestyle.  Those who retired early, despite having potentially several decades of life ahead of them, or who have been forced to retire before the abolition of the default retirement age, will have lost opportunities to earn more money.  This represent a waste of resources for society as a whole.

Still time to save more and plan to work longer – can end up better off than parents:  Even though their private pensions may not be as secure as final salary schemes, today’s younger generations still have time to do more saving and plan to keep earning, to ensure themselves a better later life lifestyle.  It is a question of changing expectations. Work on a part-time basis, as a phase of life after a full time career, can generate higher standards of living for future generations.  The more people who keep working in later life, the better the long-term economic outlook.  The idea of ‘early retirement’s is not something to aspire to, and is likely to lead to later life poverty as life expectancy rises.

Challenges and opportunities of inter-generational comparisons – learning the right lessons: The IFS study demonstrates both the challenge and the opportunity of encouraging more saving, less borrowing and longer working lives.  It is in all our interests to learn the right lessons from this research.  It is not doom and gloom, nor does it mean younger people are inevitably destined to be poorer than their parents.  It is a wake-up call for a new life plan, with a renewed appreciation of the virtues of saving and working more once the economy picks up, as I expect it will next year.

December 17, 2013   No Comments