In essence, we are being asked to consume. Indeed, it is being actively encouraged, with incentives in both the long and the short term.
The new ‘help to buy’ scheme will make it possible for us to buy more houses, and we regularly hear calls for a reduction in VAT to help stimulate sales.
At the same time, for many people the amount of take home pay left after the essentials are paid for has been falling, with bills rising and wage increases at a minimum.
So whilst we must all consume, we must also look to save - but which comes first?
Our economy has developed over the years with a range of incentives to save through pensions, PEPs, TESSAs and now ISAs.
Pensions, by their nature, have been a key recipient of incentives. From the Chancellor’s perspective it is the right type of saving as it can keep people off state benefits and provide a tax flow in the future, but in reality it is difficult to encourage people to put their money away for what could be in excess of forty years.
So here we are in 2013, on the verge of an election campaign and again discussing the need for tax relief (or savings incentives) for both pensions and ISAs.
Lots of work has been done by various parties looking at the cost and targeting of pension tax relief. It is expensive and it does tend to be higher earners who take most advantage, but then it does encourage some to make more pension contributions which produce an income stream that will ultimately be taxed and which could mean less state benefits being claimed. The debate on pensions tax relief will continue and I do think that we will see further radical changes, but I at least hope that some form of long-term holistic approach is taken.
A bit of a surprise came when it was revealed that one possible change could be to cap ISA funds to £100,000, as it appears that too many people are taking advantage of the rules. (The suggestion was a proliferation of ISA millionaires!) As I travel around the country talking to financial advisers, ISAs have been universally praised because of how simple they are to access and understand, and the fact that they have been left alone by successive governments.
Pensions are seen as the exact opposite - complex and constantly subject to political tinkering in the name of short term tax gain.
So the big question; consume or save?
Well we should all probably do a bit of each, but with the baby boomer generation progressing quickly to retirement and the increases in longevity, private saving really is key to a comfortable retirement. Statistics are showing us that we are not doing enough.
The ONS recently reported that the number of people in occupational pension schemes fell from 8.2million in 2011 to 7.8million in 2012, the peak being 12.2million in 1967. (This does not include group personal pensions or stakeholder plans.) Wider figures suggest that the number of people in pension schemes is at an all time low, and whilst the process of auto- enrolment is now celebrating a cautiously optimistic first birthday, the next two or three years look like they will be much more challenging. We will then have the problem of moving the auto- enrolment contribution limit to a level which will provide a materially decent pension in retirement.
Turning to longevity, we are all living longer and patterns of work are changing. Again, the ONS shows that in 1981 there were 2,420 people aged over 100 in England and Wales and by 2012 there were 12,320 - a fivefold increase. Add to this a previous ONS survey which showed that over one million people (10% of the age group) over the age of 65 are still in work.
We are living longer, patterns of work are changing and, for many, retirement aspirations are high. The irony is that, to have the ability to consume in retirement, we must give up/defer some of that consumption from today. We have never faced the aging society demographic that we will face in the next few years and I do wonder if there are some major societal/fiscal changes needed to get the consumption/savings balance back.
Mike Morrison
Head of Platform Marketing
AJ Bell