SAVINGS ARE FOR LIFE, NOT JUST FOR PENSIONS

Introduction

People have little confidence in UK pensions; creating disengagement from long term saving. A ‘compulsory’ approach is therefore needed to encourage planning for later life.

The ‘retirement’ concept is out-dated. People need flexible use of their finances.

A Life Plan from birth will bring a meaningful focus to finances. Children will have finances to manage; financial discussions between parents and children will flourish; the Life Plan will integrate with everyday life.

People take control of their finances at different points in their lives. Most people have important decisions to make, including children. Long term finances can be one of them.

The Concept

“Personal ownership and responsibility for life finances”

People will become empowered through education and decision making.

Assets are accumulated from birth. From a particular age (proposed 40), compulsion ceases and people can start to draw on the Life Plan income. All or part of the income generated by the Life Plan assets can be diverted to the individual to form a current asset, notably cash. From a later age (proposed 50), the assets themselves can be drawn. A lifetime of education will encourage people to save beyond these ages. Options to draw funds will encourage saving earlier in life. Flexibility and choice bring empowerment.

Constitution

The funds belong to the individual and are protected from outside influence; including divorce, bankruptcy, etc.

On death, the Life Plan migrates to the estate (for minors, the State).

Financing

A tripartite approach will share ownership. Individuals, State, and employer would contribute. We propose that earning individuals are required to pay 1% of salary; employers match twice this contribution (maybe capped); the State would match up to the UEL.

For those not in employment (including minors), a fixed State contribution would apply; possibly consolidated with other State child benefits.

Taxation

“Tax-free on the way in, taxable on exit”

Contributions are made tax-free. Investment income is tax-free (in the form of asset accumulation). The PAYE system would be used to collect tax at source on income or assets taken. No tax-free cash option.

Death benefits are taxed using inheritance tax rules.

Investment decisions and assets

From birth the funds will be formed entirely of interest bearing cash deposits (probably government bonds). At age 12, the funds are transferred to non-income producing assets (NIPAs). Children then make a simple decision: transfer the NIPA to ‘safe’ government bonds, or to a higher risk/reward private fund (eg building society). This choice is enforced annually until 17, creating six investment decision points.

At 18, all investment options become available. Again, without an active decision, the funds are transferred into NIPAs. The annual decision would persist until age 25.

The underlying funds are the simple assets currently available: listed company shares, property unit trusts, cash, bonds, etc. The key concept is: “ownership of the underlying stock, creating absolute transparency”.

Information

Life Plan material would be web enabled. Mobile phone and email alerts would draw people into their finances. Modelling tools would help people decide on funding levels. Decision tools would help people understand risk.

Communication and investment advice

Plain English would be used. Common terms from other areas of life would be adopted, eg share, dividend. People then only have one learning curve to go up.

On-line tools would enable people to manage their Life Plan. Rules would be built in to the on-line tools.

Financial advice would be formularised: it can be done. Once assets reach a certain size, people would be directed to a list of advisers who would charge a fee for advice.

In early life (including childhood) those decisions will not be of vital importance. Poor financial decisions will be a lesson learned but not a harsh lesson. Those lessons will stand people in good stead for later in life when it starts to matter.

The Life Plan assets will generate direct income – eg through dividends from listed companies. This income can easily be paid either to the Life Plan (probably in the form of additional assets, eg a scrip dividend) or to the individual, eg as a cash dividend.

Current infrastructures

Legacy trust based schemes would be run off. An option to transfer the assets to a life Plan would be available (compulsory after, say, 20 years). The S2P would be abolished immediately. The BSP would continue as a safety net.