As a nation, Britain isn’t saving enough. Experts have warned that the UK’s total household debt, which is equal to 135% of household earnings (higher than anywhere else in Europe), could pose a serious threat to the economic recovery – especially if rising interest rates leave too many borrowers high and dry.
Meanwhile, today’s young people appear to have given up on saving and building private pension plans, which could be disastrous for their financial futures unless something changes. The Centre for Policy Studies, a think tank, has recently come up with a new proposal for “Lifetime ISAs” which would be designed to support people who are trying to save at every stage in their life-cyle. Could this be the solution to the problem?
The proposal for Lifetime ISAs has several key components:
- Lifetime savings – The scheme would attempt to create a lifetime savings culture by automatically creating an ISA account for every child as soon as their name is officially registered. These “Lifetime ISAs” would replace Junior ISAs and stocks and shares ISAs with a single savings product that the individual could have for the whole of their life, including for pension saving, creating a genuinely “cradle-to-grave” savings culture.
- Tax incentives – People would be motivated to pay money in to their Lifetime ISA through generous financial incentives. For every £1 someone pays in, the Treasury would contribute 50p, up to a total state contribution of £4,000 per year. The authors argue that incentivising people to save up to £12,000 would be adequate for the needs of 90% of the population, as this is the maximum they could afford to save. Savers who can afford to would be allowed to add additional contributions up to an annual limit of £30,000, on which they would still receive all interest tax-free. These incentives would be funded by replacing the existing savings-incentive regime, which disproportionately benefits higher-paid workers.
- Long-term focus – Savers would have a degree of instant access to their money, although this would be balanced with further incentives to encourage them to keep it saved up for the long-term. Before they reach the age of 60, savers would only be allowed to access their original contributions (not capital gains or accumulated income), and they would have to repay the Treasury’s 50% contribution on any money they want to take out before they could do so. After the age of 60, all withdrawals would be at the saver’s marginal rate of income tax.
- Strong returns – Savers would have a complete choice over whether their savings remain as cash or get invested in investment funds, with a passively-managed investment fund being the default option. This should enable peoples’ savings to grow without incurring too much risk, giving them a further encouragement to continue saving.
Can people afford to save?
The proposal for Lifetime ISAs have many attractive features. It would give savers plenty of incentives to save while ensuring that they remain in control of their own money; it would also represent a clever piece of branding, replacing one of the most unpopular and discredited financial products in many peoples’ eyes, pensions, with ISAs, which is a savings brand that people seem to trust.
However, the big question which the authors haven’t addressed is whether today’s young people could really afford to save, even if they are given all of the incentives in the world to make it look like a more attractive option. Over 60% of the young people who were polled by the Institute for Public Policy Research, another think tank, in 2012 claimed that the main reason why they didn’t save was that they simply couldn’t afford to. With rising housing costs and student debt compared to previous generations, not to mention the shrinking number of reliable, well-paid, full-time jobs that are available in the modern labour market, we shouldn’t be surprised if Generation Y simply can’t afford to save, however much assistance we try to give them.