This is Pink Finance's view of the savings market with some radical suggestions to get the thinkers, thinking!
The problem does not lie in an over regulated industry, or incompetent advisers anymore. The IFA market does not need any further regulation on commissions than it has already. The new defined fee system proposed by the Financial Services Authority is enough.
This will allow consumers and advisers to agree between them the way that the IFA is paid. Commissions can then be rebated against that fee, reducing the upfront cost to the consumer.
Many people cannot afford to pay fees straight out of their pocket, so paying gradually from the premium they pay into the policy or pension, is a valuable method of paying for the advice they need. By having a defined fee system, the consumer will be able to see very easily who's over charging for their services.
Introducing more financial products that are accessible without advice is dangerous, creating a lack of understanding of finanical products. People will see more options in front of them without advice as part of the package. The Reports mentioned in our 'Savings Gap' article, take the view that a few mis-sold products are better than people not saving! In the future, we could see headlines of "Mis-Buying" scandal (sound familiar?).
Pink finance magazine is all about educating people to look after themselves, which we favour as one of many improvements. The government fails to recognise that education in basic finance is seriously lacking in this country. We need a system where children at an early age are taught about, saving, budgeting and buying their first home. This is no short-term solution, admittedly, but would certainly help consumer awareness in the future.
Pink Finance wants to let you in on a few 'State Secrets'!
The Government don't really want us to save. It's the liquidity of our monthly budget that is currently propping up the rest of the economy. The fact that you bought that extra item for the home, changed the car, or splashed out on a holiday this year, is making the economy tick.
Even though state provision is poor, the balance of work and retirement is changing, which means there just aren't enough people saving. The government imposed a 10% tax on dividends into pension funds. They figured in a world with stock market's rising they could cream extra revenue off our pension funds, without us even realising. Suddenly in a falling stock market the idea doesn't look so hot.
The government needs to realise that the people who are on low incomes, or dependent on benefits, are not going to be able to save more money, no matter how many products you throw at them. They're not inclined to understand financial products because they have no money to put in them.
We already have a level of compulsion with savings through National Insurance. By increasing National Insurance, youngsters earning today are only going to be paying extra to fund people retiring in the short to medium term.
This could be managed by ring fencing contributions made by certain groups to pay for provision for their future. This could be into their personal scheme or a government-run group scheme.
This would mean each group would find compulsory contributions more acceptable. Admittedly the administration of this system is more than the present, but with any new idea, there's going to be some pain.
Why don't the government ask IFAs; "What products would be best suited to the market"? I mean the IFAs are at the forefront, not the Associations and Travel Body's Chiefs controlling and representing them.
We already have an ISA scheme, which should be held for 5 years at least, and we already have "Stakeholder" pension, with 1% charges. The problem is there is nothing in the middle.
Consumers commonly see the ISA as a five-year deal, as this is the minimum time they should be kept. Because the product is flexible, people see this as a savings pot they can dip into. (Obviously, a temptation that works against the concept of saving for the future)
Pensions are a frightening prospect to a number of individuals, as the benefits seem so far away. Being restricted to taking benefits between the ages of 50 and 75 is just not attractive to some. The annuity system is poor value, with compulsory purchase for 75% of the fund.
Pink Finance propose 10% tax relief on special 10-year savings product, similar to ISAs over a fixed 10, 20 or 25-year term. These can be invested into cash, stocks and shares and bonds. On early encashment all the tax relief has to be repaid.
It appears to us that a lot of consumers in the past used to use endowment style products to save small regular amounts. Ask your granny about the man from the Co-op, Prudential, or Wesleyan, which used to call on a Friday to collect their contribution.
This culture has been drastically
changed over the last 15-20 years, and has resulted in a massive gap in the
savings of this country. Many of the people retiring today with the odd endowment
policy lump sum coming up will not be around in the future.
Endowments may have been poor value, due to the mix of Life Assurance and Savings,
but at least people were saving for their future. The new product would be purely
savings, with no life assurance. This country needs to commit itself to a savings
habit. Any pot you can withdraw from is just not effective.
What better way than to provide government incentives on a fixed term savings contract? The option to extend the product would be offered at the end of the term, with bonuses of tax relief for committing to another 2, 5 or 10 years. This way as retirement came nearer people could tailor their pot to their needs.
As an added use for the product the government could extend the baby bond scheme and match any contribution from parents, or grand parents up to say £5,000. This would mean the child would have a start to their savings, and a shining example of what savings look like, when they get older.
Changes to the way we save for our future could potentially win and lose an election. If we're going to think radically in this area, we should at least provide something that people feel offers added benefit for savings. Understanding, regulation and education are all part of the picture. But if all else fails, then bribe people with tax relief. Go on Mr Blair, and Mr Brown - Pink Finance dares you!
Do you agree or disagree with above?
Email the editor@pinkfinance.com with your suggestions.
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