As a nation, we are bad at saving. While the reasons for this are many and varied, the belief that house prices are a one-way bet, the design of our welfare system, and the inability of humans to properly judge their future financial needs all contribute to UK households putting less aside than their counterparts in other G7 countries.
But the importance of capital ownership should not be understated, and widening it is one of the best ways to spread the benefits of economic growth. On an individual basis, not only does capital ownership dictate how well retirement can be funded, but it also insures against the risk of a negative shock to personal finances. And on a wider basis, broadening the ability of people to accrue capital could help narrow wealth inequality.
To their credit, governments both past and present have not sat idly by as changing attitudes and demography have necessitated a response in savings policy. The introduction of Isas, cross-party support for automatic enrolment into workplace pension schemes, and last year’s move to liberalise the pensions market are just a few examples of how people are being better encouraged to put something aside for the future.
But it is not enough, and future governments should ensure that saving is an option open to everybody, and not just a relative few. Ahead of the General Election, Policy Exchange has put forward a comprehensive package of reforms that will make saving easier, more flexible, and more accessible. Taken together, the proposals would give every person in the UK the opportunity to be part of a true capital-owning democracy.
First, anybody on the electoral register and with a National Insurance number should have the option to buy a no-risk stake in RBS and Lloyds. Eligible people would be able to apply for the shares at no initial cost, and only pay for them at the time of sale. The government would retain the option of recalling the shares in the unlikely event that they don’t exceed a set floor price after 10 years, but the new shareholders would enjoy any upside.
Second, Isas should be reformed to recognise that income patterns and the ability to save are not consistent over a lifetime. People would be given the power to roll over any unused portions of their existing Isa allowances into a Bonus Isa account. Those that experience a one-off financial windfall, such as an inheritance, house sale or redundancy payment, would benefit from being able to save a much greater amount into a tax-free account within a single year.
Third, to help those at the bottom of the income distribution who will never fill their Isa, a new generation of private sector Premium Bonds should be introduced. Prize-linked savings accounts offer people the chance to randomly win a set cash prize, alongside – or in some cases instead of – a fixed interest rate. Originally introduced by Harold Macmillan, Premium Bonds remain one of Britain’s most popular savings products; private organisations should be allowed to experiment with different behavioural nudges, lottery-like mechanisms, and trade-offs between set interest rates and prizes.
Fourth, the opt-out for auto-enrolment in private sector pensions should be removed, and
the contribution rate should be gradually increased. Under the current planned 8 per cent contribution rate, a worker earning £27,000 annually over a 40-year career would only save around 55 per cent of what he or she needs to generate the Department for Work and Pensions’s recommended target replacement income. A 12 per cent contribution rate – introduced gradually, and made compulsory – would achieve that target replacement income.
Finally, individuals should have to contribute funds into a personal pot as they work, covering their financial needs for periods of unemployment in place of Jobseeker’s Allowance. The pot would act as a flexible fund, with people able to draw down on it throughout their working life to support career transitions and retraining, while any remaining balance would be added to a pension upon retirement. The cost to workers would be offset by a reduction in National Insurance contributions.
Any political party could sell these reforms as a package, telling voters that they could save more free from tax, build up bigger pension pots, own shares in a company – potentially for the first time – and see their savings grow through their contributions to the welfare state. Savings policy has come a long way in the last 20 years, but it needs to go much further.