Press Release on Treasury Select Committee Report on Long-term Savings
by Dr. Ros Altmann
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The Treasury Committee Report on restoring confidence in long-term savings, highlights some very important issues, but it has not focussed on the role of Government policy. Policy can improve confidence by incentivising new savings, e.g. by moving away from tax relief and using a system of matched payments (such as £1 for every £2 saved or £2 for every £3 saved), rather than inequitable and opaque tax relief. The Report also fails to really highlight the significant disincentive of the Government’s Pension Credit policy, which has made pensions unsuitable investments for the majority of the population. Confidence in long term savings does require change on the part of the financial services providers and advisers, but in the context of current Government policy, pension savings have been undermined. Given the failure of occupational pension schemes, the move towards defined contribution schemes and the penalties imposed by the means test on pension savings, it is impossible to see how confidence can be restored without a change in the State pension system and fairer savings incentives from Government to encourage individuals to part with their money for long periods. The particular comments are:
1. There is little discussion of the implications of moving from defined benefit to defined contribution pensions in the UK.
Workers can no longer rely on their employers to provide a particular level of pension. Money purchase schemes mean that millions of people will now be responsible for their own retirement planning, but have not been equipped to manage this substantial change. They do not get access to advice and do not understand financial issues. For example, the design of investment products for defined contribution pension schemes has not developed much and financial services companies have been slow to provide suitable options. Simple lifestyling or balanced funds will not necessarily suit all investors. The report identifies that individuals have been locked out of the advice process, but does not suggest how to make the advice cheaper to deliver (for example using the economies of scale in workplace advice), which would be much more useful for individuals than just doing away with advice and relying on generic materials. If you went to the doctor for help, you would not be satisfied if he just gave you some leaflets on diseases and medicines which fit your general symptoms and told you to go to the chemist and select what you want from the pharmacist!
2. Insufficient discussion of the disincentive effects of Pension Credit
The effect of pension credit on pension suitability is not well-described. Pension credit has made pensions ‘unsuitable’ for most basic rate taxpayers. It is not true that pension credit will always reward savings and perhaps the Treasury Select Committee was not correctly informed about how this benefit works. In fact, most women would lose all their pension savings £ for £, even with pension credit, because the complex calculation of the benefit assumes that individuals have a full basic state pension. The vast majority of women do not. So if a woman has only say, £69 basic state pension, rather than the normal £79.45 per week, the first £10 a week or so of her pension savings will be completely wasted and she will receive no pension credit for this. Thus, the woman could have saved £20,000 in a pension, which would generate an income of £10 per week, but that whole £20,000 would be wasted and she would have been better off if she had not put that money into a pension, but saved in a different form. Since over three quarters of people will be entitled to pension credit in coming years (already nearly 60% are entitled) this means most people should not put money into pensions at all.
3. No suggestion of new incentives.
Policy for restoring confidence in long term savings has relied on supply side measures, but has ignored demand. The truth is that, if people do not want to save, giving them cheap, simpler products and lots of leaflets or decision trees will still not make them do so. Policy needs to address demand, which entails better financial incentives and access to proper advice for all middle income groups, not just top earners.
4. No discussion of the role of medium term savings.
For example, there could be a half-way house between tying up money for decades and having it all instantly accessible, perhaps with a lower level of taxpayer-funded incentive than for pensions.
5. There is no mention of the potential role of National Savings
Most private investors’ idea of risk entails not losing money. If we want to encourage people back into long term savings, and financial services companies are failing to do so, then National Savings products would be ideal for medium term savings. They even have tax advantages and now have a link to equity market performance, but they carry a money-back guarantee from the Treasury! This is pretty attractive, but financial advisers have not recommended them heavily, perhaps because of lack of commission incentive to do so.
6. There is no real emphasis on the need for financial planning help
The Report still falls into the trap of just focussing on products. In particular, ‘middle Britain’ needs help in understanding how different savings products may fit into a lifetime of savings and how much they can afford to save at particular periods in their lives. Saving for events such as house purchase, car purchase or childbirth need to be combined with pension considerations, but individuals are not able to do this on their own. The Treasury Report does not focus sufficiently on planning financial needs.
7. There is no discussion of the annuity market or the needs of people after retirement
This is a glaring omission. Retired people still have potential financial planning needs for twenty or thirty years. Most retirees simply take the annuity they are offered and fail to shop around properly. Only the top income groups really get access to advice, yet Government forces people to buy one and once bought, the annuity can never be changed. The review does not mention that annuity products contain a charge of 1% -1.4%, which is deducted from the pension pot for commission, whether the person receives advice or not. The more defined contribution pensions we have, the more important this market becomes and it is clearly not working properly.
8. There is no mention of the child trust funds
These are new long term, taxpayer funded savings (18 years) which should be invested, and the market needs to address requirements of parents and children in these investment products.
In summary, the Treasury Select Committee has not looked at the issues affecting confidence in a sufficiently comprehensive manner and does not seem to show an in-depth understanding of what consumers really want and need. Consumers do not just need advice on products, they need help with financial planning, how much to save, where to save, what risks they can take when and so on. The omission of the after retirement market is disappointing, as is the lack of attention to the demand side of the market.