Why now's a good time to get into the savings habit
No one can accuse the government of not doing its bit to reinforce the savings habit in this country, bludgeoned as it has been by low savings rates and a fearsome recession that we are only now stepping out of.
Since the Coalition was nervously formed back in 2010, we've had the roll out of pensions auto-enrolment, proposed reform of the state pension, and generous hikes to the annual allowances for saving into tax-friendly individual savings accounts. Indeed, the new £15,000 a year Isa allowance, effective from the start of this month, is well worth utilising if you want to squirrel money away from the taxman.
In the light of the government's 'pro-saver' stance, it's heartening to see some evidence that it is all paying off. We are now putting away more for our retirement than we have done in some time.
That's what the findings of the 10th 'Retirement Report' from Scottish Widows, part of the mighty Lloyds Banking Group, is telling us.
According to its research, the proportion of people aged 30 or over who are saving 'adequately' for retirement is at its highest level since 2009 - 53% compared to 45% this time last year. Furthermore, we're saving more (£130 a month) and building bigger retirement funds than ever before (£40,000).
As Ian Naismith, Scottish Widows' pensions guru, says: "Finally, people are starting to sit up and take notice of the importance of planning for the future - whether this be through proactively upping their contributions due to a more favourable economic climate or starting to make plans for the first time thanks to auto-enrolment."
Yet let's not get overly carried away. Not everything the government is doing in the savings space seems well conceived.
A case in point is the prospect of so-called defined ambition or collective defined contribution (CDC) pensions. These were outlined in the recent Queen's Speech before Parliament and, provided the Private Pensions Bill gets pushed through before the General Election, have every chance of becoming a part of the rather fragmented - and confusing – pensions landscape.
The idea of CDC plans is a fine one, in theory at least. They aim to provide a pension journey that is not as predictable as defined benefit (where your pension is based on a combination of salary and number of years worked) but better value than a conventional defined contribution plan (where your pension depends primarily on the performance of stockmarkets).
As the word 'collective' implies, the schemes are huge, typically attracting contributions from workers in specific industries or professions. And their size is seen as a benefit, driving down running costs which ultimately means more pension for workers when they retire.
Yet the big plus point, according to supporters of these schemes, is how pensions are paid. Unlike conventional defined contribution plans, where a retiree purchases an annuity with their personal fund to provide a lifetime income, collectives pay out pensions from the fund's assets. There is no annuitisation. What pension you get is determined by an actuary and will depend on the collective fund's health. Pension payments may be cut when times are tough – or rise if all is going swimmingly well.
Experts claim pension outcomes for those in CDC plans are 37% better than from a traditional defined contribution plan. Compelling? Well, it would be if it wasn't for the fact that from next April, anyone in a defined contribution plan will be able to access their money as and when they wish – provided they are aged 55 or over. Annuitisation will die a certain death. At a stroke, one of the main planks in support of CDC plans will be removed.
I could be wrong but I would hazard a guess that CDC will never see the light of day in the UK.
What is required, more than anything else, is a strong economic backdrop conducive to encouraging us to save even more than Scottish Widows tells us we are saving.
Save, Save, Save!
Jeff Prestridge is the personal finance editor of the Mail on Sunday. Email him at firstname.lastname@example.org
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.