Defining the benefits of savingby Jay Elwes / March 24, 2016 / Leave a comment
Published in April 2016 issue of Prospect Magazine
Scroll to the bottom to read all the pieces in Prospect’s new pensions supplement
In his Budget speech, George Osborne did something new. He made explicit what had previously been hidden. The new Lifetime ISA, a product whose creation Osborne announced, allows people to save £4,000 a year. The government will put in £1 for every £4 saved, he said. It is a canny scheme, which in one sense is nothing more than a different way of offering tax relief on pension contributions. What makes it different is that for the first time, government contributions to private pensions will be explicit. Rather than not taking money away from savers, government will be giving them money. The political and behavioural consequences of this will be significant.
This is by no means the first time Osborne has altered the way Britain saves. He has introduced many changes to the pensions and savings system. But as the exclusive YouGov polls published here for the first time make clear, many of the changes introduced so far have left savers cold. Repeatedly, respondents to the survey said that these changes had made no difference to their pension planning.
It is a worrying finding, especially because, as Norma Cohen points out, the system faces acute challenges. Among these is the government’s “Triple Lock,” which guarantees that state pensions will remain linked to whichever is the highest of earnings, prices, or 2.5 per cent. It’s an expensive arrangement and one that the Prime Minister has vowed to keep in place. The effect of the Triple Lock is so great that it will overhaul all of the savings that are expected to come from the increase in the retirement age.
Which raises the question of whether any other country has a better system. Henry Tapper examines some international rankings of pensions systems—Britain does not come out on top. Among the many questions he raises is whether Britain should emulate countries such as Singapore and Australia, which compel citizens to save for retirement. It would offend the liberal principles of a politician like Osborne to make saving compulsory in this way, but his changes to the system have made clear a new willingness to place strong incentives before savers—opting, in other words, for carrot rather than stick.
Ruth Jackson explains on p11 that, despite these new options, there is still a case for the safe income given by an annuity. Though no longer obligatory, it is still a way to achieve a secure, if modest, retirement income. In his speech, the Chancellor set out the Office for Budget Responsibility’s projection that inflation will more than double next year to 1.6 per cent. This brings closer the possibility of an interest rate rise, which could in turn make annuities a more attractive option.
Britain is in line for more changes to its pensions system, and anything that encourages saving is welcome. But as Paul Feeney points out change for the sake of it can be counterproductive. Government can adapt the savings and pensions system, but must be careful not to create uncertainty. It is a tough, but crucial, balance to strike if the country is to save adequately for its old age.
How to save, by Andy Davis
Can Britain afford the Triple Lock? By Norma Cohen
Pensions at a glance, exclusive polling by YouGov
Who gets pensions “right”? by Henry Tapper
Annuities may still play a part, by Ruth Jackson
Here come the robot advisers, by Chris Curry
Don’t politicise pensions, by Paul Feeney