16 March 2016

We broadly welcome today’s budget. However, we would like to see further efforts in helping people to rediscover their savings habits.

The introduction of the Lifetime ISA
Recognising the incentive provided by the government is a crucial first step and, as such, the introduction of the Lifetime ISA should be congratulated. From April 2017, any adult under 40 will be able to open a new Lifetime ISA, in which up to £4,000 can be saved each year and savers will receive a 25% bonus from the government on this money. Not only does the Lifetime ISA cater for people trying to save towards their retirement (money put into this account can be saved until you are over 60 and used as retirement income) – it also provides help to first-time buyers who can withdraw the money from it to help buy a first home.  Given rising property prices and the challenges this presents in trying to get a foot on the property ladder, the linkage of long-term savings and house purchases is a welcome move.

Exempt-Exempt-Taxed (EET) pension taxation
We also welcome the government’s decision to stay with the current model of Exempt-Exempt-Taxed (EET) pension taxation. In this model contributions and investment returns are tax-exempt while retirement income is taxed. The government has clearly taken on board our submissions to its pension consultation and the submissions of other like-minded organisations. Our view is that any structure that encourages and incentivises individuals to save for the their retirement is to be welcomed and that a model with tax-free contributions, followed by gross roll up and tax taken when you access your pot, is the best way to do this.

Staying with a variable rate of tax relief cannot have been an easy decision, but we remain of the opinion that the government should not close the door on reforming this. Moving to a simple, easily understood flat rate would incentivise the overwhelming majority of people to save for their retirement and, in particular, encourage mid- and low-level earners to save.

Our own Investor Pulse Survey shows that people crave simplicity1, while international evidence supports the notion that matching encourages people to engage2. Interestingly, the amount matched is almost irrelevant.

Engagement
The overall message from the government is now one of engaging with people in a way that is simple to understand and increases financial capability and therefore, resilience. Key to unlocking this is making language around pensions jargon-free and presenting it in a way that consumers understand and can relate to.

Everyone, but especially low and mid-level earners, need to understand how pensions work and their importance for their financial future. They also need to feel encouraged and incentivised to save. If this can be achieved in the 20 or so years before the generational tipping point is reached, then the government has done a good thing for our society as a whole as well as for balancing its books for the future.

In line with this, we would have liked to have heard something concrete about the introduction of Digital IDs – digital passports that authenticate individuals' identity and enable savers to more easily open new products and safely transfer money between products and organisations. The ability to store important documentation digitally is as a concept, important. Digital IDs could remove a lot of the hassle around accessing saving and investment products, including pensions, by having required documentation readily available digitally. This could encourage more people to explore a fuller range of options. We hope that an announcement will follow soon.

Broadly speaking, we encourage any government initiative that facilitates the education and incentivisation of individuals to save for their retirement and to be able to access such savings and pensions vehicles on the basis of a level playing field. Not doing this is short-sighted.

In a country with an aging population it makes sense, for the good of both the nation’s balance sheet and for the good of the society as a whole, for the next and subsequent generations of retirees to be able to support themselves. The tipping point is estimated to be around 2035 and now, as a country, we have been given around 20 years to prepare for the future. Let’s not miss this opportunity.

Source:
1 BlackRock Investor Pulse was conducted in association with Cicero Group between July and September 2015. A nationally representative sample of over 31,000 people in 20 countries was surveyed. They were aged between 25 and 74 years old, and 4,000 were UK residents. The results of this survey are provided for information purposes only. The conclusions are intended to provide an indication of the current attitude of a sample of citizens in the UK to saving and investing and should not be relied upon for any other purposes.
2 Papke (1995), Even and Macpherson (1996), Kusko, Poterba, and Wilcox (1994), Basset, Fleming and Rodrigues (1998), Engelhardt and Kumar (2004), and Even and Macpherson (2004).

RSM-3515
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are as of 16/03/2016 and may change as subsequent conditions vary.

‘Everyone, but especially low and mid-level earners, need to understand how pensions work and their importance for their financial future.’