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Encouraging Savings in the UK

Encouraging Savings in the UK. A Lifetime Savings Framework The ‘LifeSaver’ 21st January 2002 Dr. Ros Altmann ros.altmann@genesys.net. Outline. UK savings situation Barriers to saving Government savings policy Tax relief and fairer incentives

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Encouraging Savings in the UK

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  1. Encouraging Savings in the UK A Lifetime Savings Framework The ‘LifeSaver’ 21st January 2002 Dr. Ros Altmannros.altmann@genesys.net

  2. Outline • UK savings situation • Barriers to saving • Government savings policy • Tax relief and fairer incentives • Framework to facilitate lifetime savings culture • ‘LifeSaver’

  3. 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

  4. 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

  5. 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 Problems of Current UK Saving System,Why Don’t People Save Enough?

  6. 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

  7. 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

  8. New Savings Policy Proposals • Child Trust Fund ‘Baby Bond’ • Savings Gateway

  9. 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.

  10. 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!

  11. 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 Tax Relief System Exacerbates Wealth Inequality

  12. 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)

  13. 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

  14. 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 newFixed term ISA to ‘locked’ pension section • Fully transferable/hold any products

  15. 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’

  16. A Framework for Organising and Encouraging Lifetime Savings LifeSaver E D U C A T I O N

  17. Child Section Short Term Saving Section Medium Term Investment Section Retirement Section – locked until retirement A Framework for Organising and Encouraging Lifetime Savings LifeSaver E D U C A T I O N

  18. Child Section Short Term Saving Section Medium Term Investment Section Retirement Section – locked until retirement A Framework for Organising and Encouraging Lifetime Savings LifeSaver E D U C A T I O N

  19. Legend Child Trust Fund Tax free Taxable 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

  20. Legend Child Trust Fund Tax free Parental contributions Gifts Taxable 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

  21. Legend Tax free Earnings Savings Gateway Parental contributions Gifts Taxable Incentive at age 18 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

  22. Legend Tax free Earnings Gifts Savings Gateway Parental contributions Taxable Incentive at age 18 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 PEP TESSA VCT EIS National Savings Unit trusts Shares Bonds Life products Medium Term Investment Section Retirement Section – locked until retirement

  23. Legend Tax free Earnings Gifts Savings Gateway Parental contributions Taxable Incentive at age 18 20% incentive + extra over time 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 PEP TESSA VCT EIS National Savings Unit trusts Shares Bonds Life products Medium Term Investment Section Retirement Section – locked until retirement

  24. Legend Tax free Earnings Gifts Savings Gateway Parental contributions Taxable Incentive at age 18 20% incentive + extra over time 40% or 50% incentive 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 PEP TESSA VCT EIS National Savings Unit trusts Shares Bonds Life products Medium Term Investment Section Other pensions Stakeholder Retirement Section – locked until retirement

  25. Legend Tax free Inheritances Gifts Earnings Savings Gateway Parental contributions Taxable Incentive at age 18 Pension contributions 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 PEP TESSA VCT EIS National Savings Unit trusts Shares Bonds Life products Medium Term Investment Section 40% or 50% incentive Other pensions Stakeholder Retirement Section – locked until retirement

  26. Legend Tax free Inheritances Gifts Earnings Savings Gateway Parental contributions Taxable Incentive at age 18 Direct debits Life/health insurance Credit card debt Educational fees Emergency loans 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 PEP TESSA VCT EIS National Savings Unit trusts Shares Bonds Life products Medium Term Investment Section 40% or 50% incentive Other pensions Stakeholder Pension contributions Retirement Section – locked until retirement

  27. Legend Tax free Inheritances Gifts Earnings Savings Gateway Parental contributions Taxable Incentive at age 18 Life/health insurance Credit card debt Mortgage Housing equity release marginal rate tax 40% tax Tax free lump sum Minimum annuity Withdrawals from DC pension 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 PEP TESSA VCT EIS National Savings Unit trusts Shares Bonds Life products 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

  28. 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

  29. 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

  30. Thank you for listening Dr. Ros Altmannros.altmann@genesys.net

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