Simplification is the key - Centre for Policy Studies

More documents

Recommendations

Info

PART ONE: THE LONG-TERM SAVINGS LANDSCAPE 1. BACKGROUND: WHY, WHAT AND HOW WE SAVE 1.1 Why we need to save Our population is ageing. Today approximately 10.3 million people are aged 65 and over (16.5% of the UK’s inhabitants); in 2050 that figure is expected to rise by more than 80%, to 18.7 million (24.3% of the total). 17 This is likely to have major implications for the shape of our future economic activity, including the demand for goods and services, workforce composition and productivity. 18 In parallel, at some future time we may reach a tipping point when, collectively, the UK moves from the net accumulation to decumulation of savings, as assets are increasingly realised to sustain people in retirement. In parallel, a rising tax burden (not least to fund the State Pension) on a diminishing worker population (relative to the number of retirees) may constrain the ability to save. Consequently, investment needs may increasingly have to be met by foreign capital, perhaps at a time when other developed nations are similarly capital constrained. The cost of capital is likely to rise. If this is not enough to stress the importance of encouraging people to save, consider the individual’s perspective. There is an ongoing transfer of income-in-retirement risk from the state to the individual; the retreating State Pension Age (SPA), the likelihood of increasing (state-paid) healthcare rationing and a less generous welfare state. Similarly, employers are placing more post-retirement financing risk with employees, notably through the move from DB (defined benefit, or final salary) to DC (defined contribution) pension provision. 17 18 ONS. Amongst developed nations, the extreme example is Japan: 22.6% of the population is aged 65 and over today. This is expected to rise to 37.8% in 2050; UN, World Population 2008 Revision. An ageing population may well lead to diminishing productivity. Given that assumptions for productivity growth are central to driving GDP forecasting, which is turn is used as a measure of affordability of the State Pension and public sector pensions, this raises serious affordability questions. The Treasury assumes 2% annual productivity growth in its Long-term Public Finance Reports. Our ability to innovate is likely to be of increasing importance. 3
1.2 The UK’s household savings ratio 19 The most frequently quoted indicator of the UK’s savings activity is the household savings ratio. It includes both pension contributions and debt repayment (which is akin to saving) and is closely associated with how people view their economic situation. The ratio tends to rise when economic confidence is low (e.g. when job prospects are uncertain) and vice versa, although GDP is a more readily quantifiable proxy (Figure 1). The savings ratio has averaged 5.8% since 1948 (7.4% since 1960) but since 1992 (11.7%) this ratio has seen sixteen years of decline, only reversed in 2008, when consumer confidence plummeted. Figure 1: Household savings ratio (%) and GDP (% per annum) 20 14% 12% Household savings ratio, % 10% 8% 6% 4% 2% 0% -2% GDP, % p.a. -4% -6% 1948 1958 1968 1978 1988 1998 2008 Savings GDP quarterly 2009 ratio % change % Q1 4.5% - 2.6% Q2 7.8% - 0.6% Q3 8.4% - 0.3% Q4 7.0% 0.3% The household savings ratio does not accurately represent the savings experience of the average earner. Once the wealthiest 5% of the population are removed from the data (they hold around a third of total savings), the average person had just £2,205 set aside, after increasing their savings levels by only £38 during the whole of 2009. 21 During 2009 the focus was on paying down unsecured debts, such as credit cards and loans, and making overpayments on mortgages. 1.3 Household savings: lessons from Japan Japan presages the UK’s demographic experience by approximately 30 years; today some 22.6% of Japanese are aged 65 and over, a figure that the UK is expected to reach in around 2040. Consequently it is worth looking, briefly, at the Japanese experience. 19 20 21 Household saving expressed as a percentage of total resources (gross household disposable income plus an adjustment for the change in net equity of households in pension funds). ONS data and quarterly national accounts, 4th quarter 2009, 30 March 2010. ING Group, January 2010. 4
Page 1 and 2: Simplification is the key Stimulati
Page 3 and 4: THE AUTHOR Michael Johnson trained
Page 5 and 6: A note concerning data Finding a co
Page 7 and 8: These proposals depend upon having
Page 9 and 10: SUMMARY The UK’s long-term savin
Page 11 and 12: any annuitisation requirement, prov
Page 13 and 14: Thus, had pension savings products
Page 16 and 17: INTRODUCTION There has been a flood
Page 20 and 21: Japan’s savings ratio was once th
Page 22 and 23: scheme contribution rates are lower
Page 24 and 25: Table 1: Funded pension scheme asse
Page 26 and 27: 1.9 The international perspective A
Page 28 and 29: Table 4: ISA savers’ income distr
Page 30 and 31: Table 6: The complexity of the tax
Page 32 and 33: Figure 4: Income options upon retir
Page 34 and 35: savings by delivering a framework t
Page 36 and 37: Figure 7: When non-savers might sta
Page 38 and 39: There are other aspects to consider
Page 40 and 41: 3. THE EMPLOYERS’ PERSPECTIVE 3.1
Page 42 and 43: When employees with DC funds retire
Page 44 and 45: More specifically, employers are no
Page 46 and 47: Both businesses do have important c
Page 48 and 49: year. 91 Clearly, there are conside
Page 50 and 51: elderly and the wealthy, not least
Page 52 and 53: 5. THE TREASURY’S PERSPECTIVE 5.1
Page 54 and 55: Whilst the UK’s NRR for the mean
Page 56 and 57: Currently, reducing pensioner pover
Page 58 and 59: Table 13: Net cost of tax relief un
Page 60 and 61: TEE would be hugely attractive to p
Page 62 and 63: 5.6 Tax treatment: international pe
Page 64 and 65: PART II THE PROPOSALS AND THEIR IMP
Page 66 and 67: Proposal 6: post-retirement, amend
Page 68 and 69:
7. TAX SIMPLIFICATION: SOME OPTIONS
Page 70 and 71:
8. THE IMPLICATIONS FOR SAVERS Impl
Page 72 and 73:
The higher rate taxpayers’ perspe
Page 74 and 75:
segregated from any employer-sponso
Page 76 and 77:
epresent a further step down the pa
Page 78 and 79:
10. THE IMPLICATIONS FOR THE PENSIO
Page 80 and 81:
Such principles would have to ensur
Page 82 and 83:
Figure 13: The cost of pension savi
Page 84 and 85:
pool of underlying pension assets (
Page 86 and 87:
hardship” facility, whereby cash
Page 88 and 89:
occupational pension scheme benefit
Page 90 and 91:
CONCLUSION We would save more, for
Page 92 and 93:
ACKNOWLEDGEMENTS This paper was cat
Page 94 and 95:
APPENDIX I Summary of proposals fro
Page 96 and 97:
APPENDIX II Value of assets in priv
Page 98 and 99:
depending upon age at the time that
Page 100 and 101:
APPENDIX V PRE-RETIREMENT ACCESS TO
Page 102 and 103:
APPENDIX VII FINANCIAL PLANNING TOO
Page 104 and 105:
APPENDIX VIII THE MODEL 173 The
Page 106 and 107:
GLOSSARY Alternatively Secured Pens
Page 108 and 109:
pensions and earnings, but excludes
Page 110 and 111:
those with earnings above £4,940 b
Page 112 and 113:
in cash terms, i.e. fixed at £770
Page 114:
The UK savings industry is barely t
show all

Simplification is the key - Centre for Policy Studies

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?