FOOL'S EYE VIEW
Hunting For Retirement Funds

By Jane Mack (TMFJane)
October 21, 2003

Today saw the publication of yet another report pointing out that we're not saving enough for our retirement. So it won't be news to you that more than a third of us (36%) are saving little or nothing for our future - mostly nothing.

This latest revelation comes from the Association of British Insurers (ABI) who have just launched a quarterly publication designed to monitor savings behaviour in the UK.

The first of these bulletins shows that many people are simply confused. On the one hand, most are sceptical about the future of the State Pension saying that, at most, it'll be at subsistence levels or 'pocket money' so many are aware that they ought to make provision for themselves. On the other hand, they're put off saving because of the system of means testing. What's the point in saving if it results in state benefits being taken away from them? All in all, there don't seem to be any incentives to save.

I have to say I agree about the lack of incentives. As far as I can make out, those that exist have been, or still are being, eroded. Let's take paying into a pension fund as an example.

The incentive to pay into a pension fund is obviously the tax relief you get on your contributions. For basic rate taxpayers this amounts to 22% but bear in mind you'll be taxed on that when you start receiving it. The benefits appear particularly good for high rate taxpayers who get 40%. Throw in an employer who's also making contributions on your behalf and it's an even better deal.

Where it all seems to have gone wrong though is down to a combination of factors. In no particular order, first there was the Chancellor's 'raid' on pension funds in his first year in office. Pension funds used to be able to claim back a 20% dividend tax credit which gave them about £5 billion a year to re-invest on our behalf. The Chancellor abolished this facility which means that £5 billion a year is now in his coffers rather than ours.

So when the Government keeps pointing out that there's a £27 billion savings shortfall, even I can work out that that's roughly the amount they've taken away from our pension savings since stopping the 20% dividend credit.

Another reason is that we've lost rather a lot of faith in pension funds themselves over the years. It all started with the Maxwell scandal back in the Eighties and it seems to have gone downhill from there. Now we've got Equitable Life to contend with.

It also doesn't help when companies come up with complex and unworkable investment schemes that people don't understand. Investing in the stock market has given the best long-term returns but as a fan of the cheap and simple index tracker, I just don't understand why people are prepared to hand over their money to fund managers who charge too much and who often make bad investing mistakes. All the evidence shows that index trackers outperform fund managers over the long term and, when we're talking about saving for our retirement, we are talking long term.

Another example of where incentives to save have been eroded is the tax-free savings account. Before ISAs were introduced we were allowed to save up to £9,000 a year in PEPs with any profits tax-free. Now that we've got ISAs, it's only £7,000. And, remember, when ISAs were first introduced that figure was supposed to drop to just £5,000 after the first year. The Chancellor changed his mind and promised that it would remain at £7,000 until at least the 2005/6 tax year but who knows what might happen after that?

It's no wonder that people have lost faith in saving and investing for their future – the goalposts keep being moved.

Amidst the chaos, what has comforted a great many people is the recent rapid rise house prices. Almost 70% of us own our own homes these days and bricks and mortar has become, in theory, the 'safer' way to invest. According to today's ABI report, 66% of people believe property is the best long-term investment and 32% plan to use it to help fund their retirement. At least if the government and pension funds let us down, we've hopefully got equity in our own homes to enable us to consider equity release schemes or to trade down to release the capital. That's if prices don't crash, of course.

However, even that plan might be scuppered if reports over the weekend that the Chancellor is planning to charge CGT on the sale of our own homes are to be believed. It's been denied by Downing Street but, frankly, I don't believe them much these days.

The ABI is suggesting that Government radically reforms the state pension, puts employers firmly at the centre of pension provision, gives people a choice of annuities and does more to raise public awareness about the importance of saving. It's all well and good these various organisations coming up with ideas about what to do but the one thing that's certain is that the onus is on us to provide for our retirement.

The fact that we clearly can't rely on anyone else should be the incentive and the sooner the Government makes that clear instead of pussyfooting around, the better.

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