1

A better deal for savers:

helping ordinary workers secure

decent living standards in retirement

with Rachel Reeves MP

29 May 2014

Michael Johnson

www.cps.org.uk

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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1970 1980 1990 2000 2010 2020 2030 2040 2050 2060

Impact of austerity

measures agreed

to 2017

99% in

2062-63

66% low

Ratio excluding

impact of ageing

population

(approx.)

Ratio including

impact of ageing

population

Central projection for Public Sector Net Debt to GDP (%)

We face a sovereign debt crisis

Source: OBR’s Fiscal Sustainability Report July 2013

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We face a personal debt crisis

Source: Bank of England

* Incl. credit cards, motor and retail finance deals, overdrafts and unsecured loans

Mortgages

Consumer

credit * Total

Personal debt £1,280 billion £159 billion £1,439 billion

Average debt per household £48,454 £6,018 £54,472

Average debt per adult £25,505 £3,168 £28,673

Interest paid per household - - £2,242

Savings (2012) and demographics

Population aged 65+

UK Japan

1950 10.7% 4.9%

2010 16.5% 22.6%

2050 22.9% 37.8%

OECD; National Accounts at a glance 2014. Definition for HNSR: the ratio of household saving (plus

the change in net equity of households in pension funds) to household disposable income.

Household net Net debt

saving rate as % GDP

Greece -14.6% 102%

Japan 0.8% 140%

United Kingdom 2.4% 69%

Italy 3.6% 113%

Netherlands 4.1% 42%

Spain 4.4% 60%

Canada 5.0% 59%

Ireland 5.2% 83%

United States 5.8% 100%

Norway 8.2% -167%

Germany 10.3% 50%

Australia 10.4% 27%

France 11.7% 70%

Sweden 12.2% -24%

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Ageing population / fewer workers per pensioner

+ Stagnant productivity growth

+ Rising interest rates (2015+ ?)

= Fiscal squeeze

+ Approaching saving tipping point

= Diminishing supply of domestic capital

Cost of capital to rise

We need a savings culture……but……

The squeeze is on

Tax relief, 2012-13

£270 billion of cash since 2001-02

Cost, £ billion

Up-front tax relief on employer contributions £21.3

Up-front tax relief on employee contributions £6.7

Tax-exempt 25% lump sum at retirement (approx.) £4.0

NICs relief on employer contributions £15.2

Tax foregone on investments held in pensions products £6.9

Total £54.1

HMRC; Table PEN 6: Cost of Registered Pension Scheme Tax Relief, February 2014

Tax relief: inequitably distributed

Income

distribution

% of all

contributions

% of total tax

relief

Corresponding

annual income*

Bottom half 16% 14% less than £24,000

Next 40% 35% 32% £24,001 to £51,000

Top 10% 49% 54% Over £51,000

100% 100%

Top 1% 15% 30% Over £100,000

Top 0.5% 10% 22% Over £150,000

* approx

Income tax is progressive, so tax relief is inevitably regressive

HMRC; Personal Incomes Statistics 2011-12, January 2014

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• Scrap all tax relief 50p per £1 subscribed

• Independent of taxpaying status

• Highly redistributive & simple

• Max. £4,000 from HMT: focused on first £8,000 savings

Tax relief: CPS proposals to boost effectiveness*

* Retirement saving incentives: the end of tax relief, and a new beginning, MJ, 15 April 2014

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• Scrap LTA

• Re-intro 10p rebate on dividends

• £100k IHT exemption on transfers to pension pots

• ?.......25% tax-free lump sum

Tax relief: quid pro quos

* Retirement saving incentives: the end of tax relief, and a new beginning, MJ, 15 April 2014

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• Capital crisis coming

• Industry lacks common purpose with consumers

• 80% of active managers not needed?

• Tax relief: the lowest hanging, juiciest fruit in Whitehall?

• Formally bring ISAs into the retirement arena……

………the Lifetime ISA

• What future private pensions?

Conclusion