The sorry story of saving is well rehearsed by now: an ageing population working longer for less, high inflation and low interest conspiring to depreciate savings. Meanwhile the economy depends on personal debt to keep it liquid.
The message from the government is contradictory: spend to get the economy moving, but remember to save some for retirement.
Post-crash measures are focused on low base rates and Help to Buy schemes designed to stimulate in the short-term, but what about the long?
Pensions and the crash
If there are two things people save for, they are pensions and property. The property market is on the upswing again, and the government seems determined to keep it that way. Pensions are another matter.
Measures designed to get the economy moving following the financial crash of 2007-2008 are hitting pensions hard. Quantitative Easing, by reducing the number of gilts on the market (and thereby increasing their value) has hit annuity rates. Low interest coupled with high inflation sees pension pots decrease in value by the day.
Businesses seeking to save money are switching from final salary pensions to defined contributions, or closing schemes altogether. Longer life expectancy stretches money further, while the prolonged, lower quality of end-of-life means care costs are higher. And all the while wages are stagnating or falling, making it harder to save in the first place.
Things aren’t looking good for anyone – whether retiring next week fifty years from now.
What is the government doing?
This perfect pension storm is circumstantial. It’s not the government’s fault. And although the effect of stimulus measures on pensions is unfortunate, it is understandable collateral damage. All the same, it should surely be the state’s responsibility to mitigate this unfortunate set of circumstances.
To a certain extent it is taking action. Although there are certainly issues that need ironing, Automatic Enrolment into Workplace Pensions is undoubtedly a Good Thing, at least for ensuring people have some savings. The flat-rate pension should in theory make millions better off (in theory). Controversy aside, Help to Buy is a well-meaning attempt at getting young people onto the property ladder (the way to save privately for retirement in Britain).
On the other hand, democratic governments operating on four-year cycles have long seen the pensions of tomorrow as ripe pickings for today. Although Brown’s raid on pensions in 1997 – axing tax relief on dividends – is infamous, his Conservative predecessor Lamont was the first to cut this relief, from 25% to 20%. And this government is no different.
Wielding Westminster’s favourite stealth cut, inflation for state pension uprating is now measured on the lower CPI measurement rather than RPI. Private pension funds tend to follow suit, taking machete sized chunks out of pensions both public and private.
And in an effort to reduce the amount spent on pensions tax relief, Osborne has also reduced the size of pension pot that comes sans tax; a hefty cut from £255,000 to £50,000. This may only affect the wealthier among us, but this is purely for austerity, not redistribution.
Whichever way you slice it, the state pension is not enough for more than a minimum standard of living. Some private saving at least is required. With all the hits to pension funds, alternative methods such as ISAs, investment and property are looking more attractive to long-term savers – and the government knows it.
ISAs are extremely popular, and used to their maximum potential can raise serious cash in a way few other options can match. If the government was serious about encouraging savings, an extension of this scheme would make the most sense. But there is no movement here.
Investment has, and always will have, the potential for the largest growth. But most people are too risk-averse to engage in it. If the state wanted to stimulate small-scale private investment, a reversal of the 1997 dividend tax credit axing would make sense – simultaneously injecting more cash to the markets. But despite Osborne’s strong feelings on the matter, there is no action here either.
Property is a thorny issue. Much criticism has been levelled at the Help to Buy scheme due to its role in inflating a new property bubble. The real solution, the critics say, is to build more houses. We need a larger supply of social housing in which to house ‘Bedroom Tax’ refugees and driving down house prices, and therefore private rents, is a more long-term, sustainable way to make housing affordable.
But the government is keen to protect those who already own, not pushing them into negative equity. They’re walking a tightrope between protecting existing savings and pricing the young out of getting their foot on the ladder.
Disincentive to save
A current twenty-eight year old with a median income of £24,500, no savings and no pension plan will need to save £792,000 by the age of 67 in order to live beyond the bare minimum – the odd dinner out, a concert, a holiday every now and again.
Faced with flat wages, a rising cost of living and a squeeze on savings, it’s hard to see how the majority of today’s generation will manage anything like that. Although the government’s moves on Workplace Pensions are welcome, clearly a more radical solution is required.
Some ideas have already been floated – a flat-rate pension tax relief of 30% would redistribute what is currently weighted towards the wealthy, lowering the cap on tax relief even more would do the same, and possibly even provide for raising the single-tier pension beyond ‘bare minimum’ levels.
Measures like these would be a tough sell, but essential to prevent a future crisis. The current system does little to reward savers, and for all the talk of rebalancing the economy our current growth looks just as debt-fuelled as pre-crash.
What we need now is a government that looks beyond the next election.