The State pension – how the low paid can end up subsidising the well-off

If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck; that is of course unless we are talking about the state pension.

Despite the fact many of us consider it part of our overall pensions saving plan and that we all contribute to it, the state pension is a blunt instrument that has no means of adapting to the varying circumstances of the individual.

Unlike other pension types, there is no flexibility to drawer earlier rather than later and there is no increase in benefits for those with a short life expectancy. The net effect of this is that those in some of the poorest places in the UK can end up subsidising those in the most well off. … Continue Reading

Is it self-interest that stops the Government ensuring savers receive fair returns?

At the recent press conference for the publication of the Bank of England’s Quarterly Inflation report, Mervyn King, the Governor, defended the recent lending record of banks – fewer loans at increased rates – by referring to the high costs banks were facing in obtaining funds.

This statement might raise a few eyebrows amongst UK savers, who have over £1 trillion deposited with banks and building societies. They are a major source of the funds that are lent out, but are currently receiving the lowest interest rates they can remember.

Banks raise the money they lend out from two main sources: either retail deposits, which are our savings, or the wholesale funding markets, ie from other financial institutions, companies, councils etc. Up until recently the cost of borrowing these wholesale funds has been more expensive compared to pre-crisis levels and also compared to retail deposits, perhaps explaining Mr King’s assertion. … Continue Reading

Why save when you can inherit?

Is any kind of pension planning better than none?

That poser might seem like a no-brainer – surely any savings strategy is superior to a void?

Yet an emerging thread of what might gently be described as ‘last throw of the dice’ thinking looks set to challenge this.

Here’s the mooted long-term savings plan as roughly outlined by an increasing number of clients (mainly in their early 40s) when talking to their financial advisers (and passed on with incredulity to me or others equally agog at the oft haphazard direction of the UK’s pension savers).

“I know it might sound macabre but my main pension is the inheritance from my parents,” is how their pitch begins. … Continue Reading

Will progressive policies be fair to savers?

This coalition Government puts much store in talk about fairness and progressive policies. But how fair have they been to savers? Fairness isn’t about taking from those that have and giving it to the poor; things are a little more complex since Robin Hood was faced with a tyrannical Sheriff of Nottingham.  Fairness should be about ensuring that those who try to help themselves and provide for their own future are encouraged and rewarded or, at the very least, not being penalised for doing so.

The Government is responsible for taxation rules, it borrows, it regulates and it sets targets for inflation. It has all the tools at its disposal to make a fair and level playing field for savers. Whilst it is prepared to pay lip service to the need for people to save and has proposed to make it compulsory for everyone to contribute to a pension it has not committed to doing anything that will ensure that the people who have saved will be better off for doing so and won’t end up being penalised for it. … Continue Reading

It is time to promote saving not just spending

The economists at the Bank of England know very well that it was encouraging people to spend what they couldn’t afford that got us into this mess, yet in its recent Inflation Report the Bank made it quite clear that they are relying on a reduction in household saving to help boost demand in the economy.

To them, saving is a behaviour that detracts from demand; their remit simply does not extend to ensuring that the UK economy is supported by the right level of savings. We need a much broader and long term view that recognises the importance of the level and distribution of saving in the economy.

It is not even the case that the level of saving has bounced out of control. Over the past twelve months the savings ratio (the proportion of our disposable income that we don’t spend) averaged 7.5%. Although a big leap in comparison to the previous decade’s average of 4.2%, it is still lower than the overall average for the 70s, 80s or 90s.

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Will your pension support you for the rest of your life?

With average life expectancy at age 65 now about 82.4 years for men and 85 for women (ONS October 2009) and steadily increasing, anyone buying an annuity today faces some pretty tough decisions.

The annuity they are buying will be part of the income they will have to live off for the rest of their lives, which for those retiring at 65 will on average be 17.4 years for men and 20 years for women. All of whom will obviously hope and plan for it to be much longer and for many it will be.

So do you buy an annuity for life which pays the same amount, year after year, with no protection from the ravages of inflation, or do you opt for inflation-linking, which is prohibitively expensive?

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Savers, cash cows for the banks and the government to milk at will

The drastic action taken by Gordon Brown to fix the banking crisis now seems to be paying off for the sector and the new Government alike.

The banks are starting to look in good shape; Lloyds Bank Group has announced a massive pre-tax profit of £1.6bn and RBS are showing good signs of recovery and, of course, they continue to pay out those notorious bonuses.

It is going well for the Government too. Its investments in the banks look set to create a healthy return when it sells its shareholding onto savers and pension funds, enabling them to buy back much of what they already owned before the crisis. And of course the populist tax on bankers’ bonuses is thought to have raised some £1.5bn in very welcome extra revenue for the Treasury’s coffers. On top of this, details of the new bank levy are emerging and Chancellor Osborne has announced that he intends for it to generate an annual £2.5bn for the Government. … Continue Reading

Welcome to the UK pensions saving casino

Picture a shabby casino whose lights are grubby and dim, making it tricky to get a clear view of what’s going on. There’s a sordid air about it, a palpable sense of despair at repeatedly handing over piles of cash only to end up empty-handed. A weary resignation pervades that, in reality, only the House ever wins.

This isn’t any old seedy rundown joint, though, it’s the UK pensions saving casino where most of its millions of working citizens must play if they want to build a lump sum big enough to provide a private pension in retirement.

Given the slow-burning national unease about inadequate pension provision, it might seem faintly ludicrous that the majority of today’s savers – bar those in final salary schemes – must take such a huge gamble with their money. … Continue Reading

How to have your inflationary cake and eat it

Inflation is proving to be the Chancellor’s best friend. In it he has an ally that is systematically reducing the real value of the UK’s debt and, at the same time, by changing the measure of inflation used to index link certain expenditure he is able to reduce Government spending. The fact that it is also eroding the value of the Nation’s savings seems to be of no concern to him at all, though.

Savers hold a total of £1.085 trillion in cash deposits that reduce in value by an enormous £10.85bn for every percentage point of inflation that they can’t make up for in interest which with today’s low returns, is most of them.

The Government, however, is more interested in its effect on the National debt, which is in the region of £900bn. Each percent of inflation reduces the value of the debt by a similarly massive £9bn a year.

Whilst on the one hand, however, Government favours high inflation, it is also in its interest for any index linked spending to be tied to low inflation. In accomplishing this neat trick, the Government is busy switching its use of the Retail Price Index (RPI) to the lower measure of Consumer Price Index (CPI) as the default for index linking payments. In so doing so it is able to save huge sums – a predicted £6 billion a year in benefit payments alone. … Continue Reading

7 Views on Saving in the UK

If you watched BBC2’s Money Watch program last night (21^st July)  you would be forgiven for thinking all savers problems are caused by the current extraordinarily low base rate at the moment and all we need to do is hang on until the Bank of England decides to bring it back to more normal levels.

However the issues facing savers are much broader, they are engrained in the Government’s economic policies, the tax system, the benefits system, pension regulations and also the way our financial institutions operate.

It is also worth commenting that when economists, politicians and commentators promote spending over saving as the key to economic recovery, they seem to lose sight of the individual lives that are affected by this macro-economic argument.  The majority of savers are not hoarders; they are ordinary families and individuals taking responsibility for their own financial situation. They are making sacrifices now in order to make provision for a better future for themselves. It is through encouraging and enabling savers to do this that true long-term economic prosperity lies, not through penalising and squeezing them in the hope that a little more spending now – regardless of the long term consequences – will get the country back on its feet.

During recent months, Save Our Savers have collaborated with seven leading experts to provide a balanced and objective perspective on the main issues currently facing savers in the UK. This work has now been published in our free e-book ‘7 Views on Saving in the UK‘

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