August is usually a fairly boring month for opinionated contrarians such as myself but, over the past few weeks, there has been a flurry of papers and surveys that collectively give us a hint of how the long-term savings market may evolve.
Perhaps the most important thinking has been done by the inestimable Michael Johnson at the Centre for Policy Studies. Johnson is part of that growing body of opinion that argues against a false divide between technical pensions and user-friendly ISAs.
Johnson would, I am sure, agree with my core contention we have somehow inherited an impossibly complex savings incentive system. This complexity has bound investors in intricate rules which have had the net effect of discouraging long-term savings, except in houses or among the well to do.
Pensions simplification will help, but in practical terms it does not address the issue many ordinary savers face, namely “I only have enough money to invest in one product, so which one should I focus on, my ISA or my pension?”
Pensions simplification will help, but in practical terms it does not address the issue many ordinary savers face
Johnson suggest a Lifetime ISA which will “incorporate cash, the new ISA, the stocks and shares NISA, as well as the Junior ISA” with the over-arching aim to create a cradle to grave solution. He says such a move would “thereby signal the emergence of a lifetime savings agenda (as opposed to pensions)”.
Johnson envisages a tax relief incentive which would mean for every £1 saved in a Lifetime ISA, the Treasury would contribute 50p, up to an annual allowance of £8,000.
According to Johnson, this “Treasury incentive, capped at £4,000, would be paid irrespective of the saver’s taxpaying status” with withdrawals before the age of 60 limited to original contributions, provided 50p was first repaid to the Treasury per £1 withdrawn. He adds post-60 withdrawals would be taxed at the saver’s marginal rate of income tax.
Johnson rightly suggests merging pensions and ISAs in this way will help “engage Generation Y, in particular, with retirement saving, acting as a savings chameleon, and incorporating both ISA-like and pension-like features.” Crucially, he says savers would be able to choose between the two.
His Lifetime ISA is a great idea, but it has two big flaws. The first, and perhaps most important, is the currently lamentable state of financial knowledge and education.
Only a few weeks after Johnson outlined his Lifetime ISA proposal, deVere Group released a slightly worrying press release which observed a third of savers have “actively enquired” about raiding their pension pots next April.
According to deVere Group’s Reece Fallaize, many of the firm’s consultants report “individuals are asking about taking out their pension savings, even when they do not have a need for the money”.
Fallaize says many of those with a pension are initially attracted to the idea, but when confronted with the reality, quite rightly, ditch the notion.
However, Fallaize points out “some individuals might not necessarily have the financial literacy to always make the most informed decisions.
Mistakes with retirement planning can be extremely costly on many levels, for the individual and their families, as well as the State, and are often incredibly difficult to overcome.”
Put simply, the vast majority of investors need advice, advice they probably do not want to pay for. Sadly, the bitter truth is that, in the absence of this advice, many will make incredibly stupid decisions.
The Lifetime ISA idea may indeed make the problem even worse – just imagine the wave of pensions liberation claims that could follow any big move that equalises the pensions and ISA structures.
The answer is to fix financial education, but this will take countless generations of hard work. The good news is more than a few members of Generation Y are beginning to get smart. They understand houses are not a pension, and they are also actively deciding between ISAs and pensions in an informed manner.
My other big concern about Johnson’s sensible reform is that it puts tax relief at the core of innovation, whereas I have a feeling all forms of large-scale tax relief for savings will eventually be abolished.
I have a gut instinct which tells me an implicit social contract may emerge which will legitimise even tougher welfare cuts as long as tax subsidies for the middle class are abolished – taking all forms of savings-based tax relief with them.
David Stevenson is a Financial Times columnist, editor at Portfolio Review and consultant.