The Government wants to get more people to save for their retirement, particularly the low-paid. On ...
The Government wants to get more people to save for their retirement, particularly the low-paid. On the face of it, this looks like a sensible idea. European countries, including the UK, are facing a pronounced demographic shift.
Our populations are becoming more and more elderly and our birth rates are falling. Increased life expectancy is the other factor putting a big strain on this system.
All of this is putting pressure on a system that relies on tax paid by today's workers, in the form of national insurance contributions, to provide pensions for the retired. When the state pension was introduced, there were more than 25 people in work for every pensioner. Today the ratio is about 3:1 and will continue to decline.
The answer seems obvious: we must all save more and look after ourselves. This is one of the reasons the Government is hoping to bring out a new range of Sandler stakeholder investment products. However, it is far easier to say 'people must save more' than it is to actually help them achieve it. One reason for this is the amount of debt most people have.
Large numbers of people rely on debt to fund the lifestyle they regard as their right. Indeed, it has been consumer spending, backed by property prices, that has kept the UK out of a full-blown recession in the past three years.
That spending would be impossible if consumers had not been taking on large amounts of loan and credit card debt. Without debt, there is less spending, and less spending leads to less economic growth.
Of course, while the positive effects of that consumer spending have kept the economy out of recession, everything has to be paid for eventually. Here lies the nub of the Government's problem in encouraging savers.
It makes no sense to build up a savings fund that earns 2%-4% interest at best when you are paying up to 29% in loan or credit card interest. This applies most directly to the low-paid workers the Government particularly wishes to target.
The fact is, many of the low-paid simply do not have enough money to pay off high-interest debt, build up meaningful savings and still enjoy a reasonable standard of living.
The evidence to date suggests that, given the choice, the low-paid will not sacrifice their standard of living now so that they may enjoy a small benefit at retirement. It is difficult to blame them for this attitude.
Recent figures from the FSA indicate something like one-fifth of households are already having trouble meeting repayments on existing debts and that mortgage costs are swallowing up a quarter of household income in 40% of cases.
In light of this, the Government's expectation that a few low-cost savings products will have any impact on people's spending and savings patterns is absurdly optimistic. Current pensions and savings policies are well intentioned but doomed to failure.
Corin Vestey is investment editor at BestInvest
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