The Treasury Committee has recently rattled through several key issues facing the UK’s savings and retirement agenda at breakneck speed.
Its report on Household finances: income, saving and debt found that households are finding it increasingly difficult to save, partly due to the pressure on finances and the current environment of low interest rates. MPs are interested in how people can be incentivised to save more.
The report starts with the finding that many households lack ‘rainy day’ savings buffers, but at the same time there is a lack of evidence tax relief incentivises savings, especially among lower income households.
Instead of tax relief, its preferred incentive is cash bonuses. We will see how effective that could be once the new Help to Save scheme is rolled out from October, which gives people cash bonuses, but no tax relief and no ‘growth’ on their savings from interest rates or investment in the stockmarket. It feels like a starter pack for savings, and one we could potentially use to lever people into other types of savings.
The Committee shouldn’t be too quick to dismiss the power of the Isa market though. It’s true the market has fallen off, but in 2016/17 people paid £62bn into 11.1 million Isas, meaning an average subscription of £5,558 according to HM Revenue & Customs. That is a lot of saving. We should be celebrating this, and working out how to encourage lower income families to kick start this savings habit.
The section on saving for retirement is also interesting. The Treasury Committee MPs have a lot of positive things to say about automatic enrolment. There is no doubt this is a successful policy, but I agree with the report in that the government is showing a lack of future direction on areas such as contribution rates and extending it to the self-employed. We cannot rest on our laurels and not build on auto-enrolment to encourage higher pension savings.
Again, the Committee questions whether the tax reliefs offered to pensions are working, and it has a few suggestions to improve matters.
Firstly, it wants to see the lifetime allowance removed completely and replaced with a lower annual allowance. I must say, I like this idea.
Getting rid of the lifetime allowance and the pesky benefit crystallisation events that accompany it would make both understanding and administering pensions much easier. And a lower annual allowance sounds like a fair price to pay. But only if it means one annual allowance, rather than the three different types we have now.
Another suggestion is to replace the current system of tax relief with a single rate. Again, I agree this is worthy of further thought.
But it exasperates me to read yet another report which includes a headline proposal to move to a single rate of tax relief with no thought given as to how it could affect defined benefit schemes. There is no doubt the bulk of pension tax relief is paid to these schemes, and if we are to introduce a single rate then it has to apply to every pension scheme, even public sector ones. Now is the time to move beyond the rhetoric – let’s have a serious review about the implications for a single rate of tax relief for all pension schemes.
The Committee has no love for the Lifetime Isa and would like to abolish it. I think it’s too early to make this call. But I would urge the Treasury to change it, and to do so soon. Applying an early exit penalty of 6.25 per cent to savers' payments feels prehistoric in today’s environment. If people have to cash it in, simply pay back the government bonus they received. Also, allow adviser fees to be paid from the fund without penalty.
Finally, the report has several different things to say on planning for retirement after pension freedoms. A lot of this is centred on introducing more defaults and getting more people to seek guidance.
I for one don’t think we should try to introduce single defaults into the pension drawdown space. Everyone’s retirement is too different. Instead, I agree with the approach the FCA is proposing of guiding non-advised consumers through to a solution.
And while I agree we need to increase the number of people seeking guidance on their retirement choices, it’s sad to see that neither the Treasury committee nor the FCA in its recent Retirement Outcomes Review considers how we can increase access to advice.
Having the help of a regulated adviser gives people the best chance to plan how they should take their retirement income. We should be aiming high and encouraging more people to seek advice and the help they need.