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Why it's time to force the issue on savings

Savings rates have reached their lowest levels since the 1960s and attempts to tackle this are falling short, says author of 'The No Spend Year'.

 
Why it's time to force the issue on savings

With savings rates at historic lows, we know for a fact that people aren’t putting money aside but the question of how to get people to save more has so far eluded policymakers and the financial services industry.

The latest figures from the Office of National Statistics reveal that Brits are saving the smallest percentage of their disposable income since the 1960s. The proportion of income saved - known as the savings ratio - dropped from 3.3% in the last three months of 2016 to a paltry 1.7% in the first three months of this year.

It’s a dire state of affairs and one that’s not helped by the low interest rates being offered by banks and building societies, which continue to fall. 

Bank of England figures show the average easy-access savings account pays 0.15%, down from 0.47% in January. Hardly inspiring.

Better rates would, of course, encourage people to save, but that would have to coincide with an interest rate rise from the Bank of England, and that looks unlikely. It seems that the savings ratio will languish for some time yet.

The real problem is the lack of long-term savings, and crucially how we incentivise it.

The government this week announced, in a move that shocks precisely no-one, that it was bringing forward the state pension age rises it had pegged in. The pension age will now increase to 68 between 2037 and 2039, rather than from 2044 as originally planned, meaning six million 39 to 47-year-olds will have to wait an extra year for their state pension.

They’ve now got an extra year to put some cash away for their retirement, and we really need that extra time. The average person in the UK retires with around £50,000 in their pension - which may seem like a large sum but is the equivalent to about £2,500 of income each year, so don’t book any cruises just yet.

With an extra year before retirement added on or not, the problem remains: how do you get people to save more?

A review by the Pensions Policy Institute (PPI) suggests it could depend on their age. Younger people benefit from help understanding their finances, known as financial capability, and are happy to receive this help online, while older people want more tailored and detailed help, and want someone to sit down with them face-to-face, according to the PPI.

Broadly, the PPI identified six ways to help people save:

  • Compulsion - forcing people to save into a pension, which the government stopped just short of with 'auto-enrolment' workplace pensions, which allow you to opt out.
  • Defaults - putting people into default savings if they don’t want to, or can’t, make the choice for themselves.
  • A safety net for those who are in serious financial hardship.
  • Consumer protection so that people feel like they’re not going to get ripped off.
  • Behavioural nudges tailored specifically to a person’s life.
  • Offering them freedom to take their cash out when they want and spend it, rather than locking their money in.

We’ve tried defaults with auto-enrolment, freedoms by allowing savers to cash in their pensions and the regulators are making headway on consumer protection.

However, I doubt it’s enough. Too many times I have spoken to pension experts who publicly extol the virtues of nudges and defaults but privately admit that compulsion is the only way to really get people to save enough for retirement.

Australia has had a compulsory workplace pension system, known as the ‘superannuation scheme’, in 1992 and it seems to be working out pretty well for them. A 2015 report from the Association of Superannuation Funds Australia showed the average man retired with a ‘super’ pot of AUS$292,500 (£178,300) and women with AUS$138,150 (£84,212).

It’s clear that compulsion equals a healthier pension balance, there’s no getting away from that. Of course, it’s not a politically clever move to force people to lock their money away for decades but I think that time is edging closer.

The current government has already bitten the bullet and accelerated the state pension age, but the real challenge is dealing with the impending pension crisis we will have on our hands if we don’t get people to save for their futures.

21 comments so far. Why not have your say?

Mystery Woman

Jul 20, 2017 at 17:02

Low interest rates, taxed at all stages, plus the 'rules' being changed too often, do not encourage anyone at any age to save!

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Mystery Woman

Jul 20, 2017 at 17:02

Low interest rates, taxed at all stages, plus the 'rules' being changed too often, do not encourage anyone at any age to save!

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Truth Searcher 2

Jul 20, 2017 at 17:34

The state pension is the safety net. Offering more will discourage saving, not encourage it.

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Micawber

Jul 20, 2017 at 17:37

The least HMG could do is to offer NS & I index-linked savings, tax free with a tiny % on top.

But they don't and won't. Until they do, nobody will take these official pleas seriously.

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Donald Chan

Jul 20, 2017 at 17:49

Singapore imposes a savings regime. It's a nanny state but perhaps that's what we need.

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Andrew Stevenson

Jul 20, 2017 at 17:57

If you save, and live long enough to end up in a nursing home, you will find you are not just paying the cost of your own care, but also for at least one other person. The clever guy, who spent every penny he got. Plenty of holidays, nice new cars. wine women and song. You would have to be a complete idiot to save a penny...

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Donald Chan

Jul 20, 2017 at 18:01

This clever guy, Andrew, also has to know exactly when he is going to check out.

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Long Gone Expat

Jul 20, 2017 at 18:06

"Australia has a superannuation scheme" but any time the state gets involved subsequent governments always come along and change the rules, so that doesn't help at all either.

I put a bit in a lot of pots but oddly enough my best return so far has been on Bitcoin. A gamble I know, and originally only did it for fun, but now I think it has a long way yet to run over the next few decades. The best thing and why I think that it will go so far is because of no government intervention. No CB interest rate comments to move it up or down. The genie is out of the bottle now and as these go more mainstream I can see it well worth putting a small part of one's savings in Bitcoin as a store of wealth that cannot be inflated away. Non correlated with traditional markets too.

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Long Gone Expat

Jul 20, 2017 at 18:08

"Plenty of holidays, nice new cars. wine women and song" Says Andrew above. Yep and waste the rest of it eh?.

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PaulSh

Jul 20, 2017 at 18:29

The reason why interest rates for savers are so low is government and other institutional interference. So now we're proposing yet more interference to fix the side effects? We'll end up like my poor auntie in hospital who is taking drugs to counteract the side effects of drugs that she's taking to counteract the side effects of yet more drugs.

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Bestmate

Jul 20, 2017 at 18:57

@Donald Chan

Not really true Donald. If you spend it all the State will look after you, that's the point, irrelevant of when you "check out"!

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Donald Chan

Jul 20, 2017 at 19:14

I think the change from having it all to being owned by the state might be a bit much to bear. It's an old argument but hopefully will not carry much credibility on a financial web.

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Bestmate

Jul 20, 2017 at 19:19

@Donald Chan

Of course you are correct. The theory of what I stated above is fine, but the reality is quite different. I would be the very last to spend it all and trust in the state. However, if you are that way inclined knowing about when you drop of the old perch, I dare to venture, would be a tad irrelevant.

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Jasper40

Jul 20, 2017 at 19:49

Recently a conversation took place at work. I was appalled that hardly any of my colleagues had ANY savings at all. We are not talking of young, single persons living with parents but persons rangeing in age from say 33 to 52yrs and most with dependent children. They pay their bills and then spend all of what remains. What happens if they lose their jobs or a long term illness or a large repair bill? They borrow money. I know how difficult it is to save, I had two children, one disabled so I couldn't work and my husband was self employed in the building industry. When work was hard to come by and everyone in the industry was undercutting each other just to have work we always had savings to pay the bills or for those unexpected expenses. No he didn't earn a fortune but we were careful and this has enabled him to retire at 65yrs before his body is completely wrecked by manual labour unlike others he knows who are still working in their late sixties despite some having serious illnesses. I'm slightly younger and work part time, we don't have a huge income but with our investments we can draw on we are able to enjoy having holidays etc while we still can. I hate to think what the future holds for my colleagues as most of them are only paying the minimum into a pension fund too.

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Chris Clark

Jul 20, 2017 at 20:49

Long Gone Expat - yes, same on Bitcoin so far..! It's in a bit of my SIPP marked "Danger - look with care."

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Money Spider

Jul 20, 2017 at 23:08

The majority of people who are 'not saving enough' are financially unsophisticated so they are most likely to look at unsophisticated products when they do save i.e. cash savings accounts, building society bonds etc. With interest rates at their lowest level for 300-odd years (if I recall correctly) someone is not going to get excited about a saving interest rate of <1% when inflation is ~2.5%.

It's hardly rocket science. Hand wringing will achieve nothing on the savings front until the BoE gets real interest rates back to a historically 'normal' level. Don't hold your breath.

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masud

Jul 21, 2017 at 10:36

Tax on dividends [ 5000 to 2000] adding one or more years for claiming old age state pension , increasing local council rates, No pay increase & so on, how any one can save?

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Anonymous 1 needed this 'off the record'

Jul 21, 2017 at 10:48

As someone who as worked hard, made sacrifices, and become a multimillionaire, I can confirm that if you save you end up paying for those that don't. The legislation is constantly changing making it less attractive to save. Long retirements in poor health with high social costs are very expensive - particularly when you are paying for other people too.

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espinasseur

Jul 23, 2017 at 17:05

The most effective saving that will suit us in our late 70's is one that works as an insurance policy: we deposit a lump sum (each, self and partner) and that (ensures payment of all our expenses (old people's home, home care, social care, any care that will be needed in our older ages). Most of our savings are tied up in our residential home -- and we would dearly like to downsize and put the saved monies towards two insurance policies to pay for all kinds of cares that will be needed inevitably (if we are lucky enough to live long enough). But interest rates are so, so low that hanging on to the house seems to be the financially the most sensible thing to do -- though this is not the most convenient or practical course of action (i.e., hanging on to a larger- than- needed house with it upkeep expenses and bother) at our ages. NS & I could offer an attractive savings scheme that tracks or is close to the rate of house price increases, perhaps -- for people who have a limited period to to live, statistically. That lump sum can then be used as an insurance policy to meet the considerable costs of old age.

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Donald Chan

Jul 23, 2017 at 18:13

So, who's going to finance the "attractive savings scheme"?

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espinasseur

Jul 23, 2017 at 20:53

The "insurance system", I reckon, as at these ages of the insured, the chances are very high for the "system" or the "scheme" to make enough profit in the long run (with the increasing numbers of the insured not making any or full use of the premiums paid) -- provided, of course, the one off premium (or several premiums) are well costed etc. And the profits thus made can be passed on (in order to continue the scheme) to the next cohort of the aged and the ageing.

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