When Savings Got A Bad Name

When I was young, my parents and grandparents drummed it into my head that I should always save some money. I followed their advice when I could, starting my first bank account as early as possible and setting money aside.

Their advice certainly helped me buy my first home soon after I started work as I had plenty for the deposit. Bizarrely, I followed the advice of a rugby playing mate and went for a 100% mortgage and a whopping life insurance policy on an interest-only mortgage despite being single - his advice was to blow my savings on material things that had no long term value. Later, after meeting and marrying an Independent Financial Adviser (IFA), I got things back in check. But it was only when she opened my eyes to what I would need in retirement without the buffer of one of those super company or public service pensions that I started to really save.

Over the last 10 years or so, there has been a huge focus on getting credit in Britain. Banks and credit card companies have fallen over backwards to literally throw cash at us, not just to buy homes but to fund a fantastic lifestyle of flashy cars, superb holidays, up to date whizz gadgets and big TVs and much more. We have never had it so good as we used our own financial instruments to supplement our dwindling (on average) household incomes. In the meantime, our level of real savings has been negative. It was almost crazy to save, in fact, so cheap was the money thrown at us.

Pensions probably fared worst but savings generally have been negative in comparison to our monthly income. Beyond my pension, my wife and I save with ISAs regularly and this year we cashed some of those in at a lowish point and then bought back in using a scheme I had no idea existed called OICs. By doing this we have fared very well and the OIC alone has increased nearly 40% so we have not lost anything during the crisis and our savings are still tax free.

It struck me though, that savings seem to be the last thing on everyone's mind. Although the level of debt on credit cards has actually come down by the odd percent for the first time in ages, outside mortgages, Britons have over £1 trillion of unsecured loans. In trying to kick start the economy, one of the first things that was focused on was rekindling the 'Asset Backed Security Market', or housing markets to us mere mortals. While it made sense to get money into people's pockets in the short term by leveraging their assets, it was clearly exactly the same plan that had got the nation into a financial mess. So long term, there has to be a plan to get Britain saving more.

The problem is that it is not as easy as it sounds - we all know the score. Just when I think I'm on top of things, the washing machine breaks down or the carpet gets stained, the floor needs repairing, the lounge suite is suddenly wearing. With all the juicy sales on all year round these days, there is a temptation to think we are getting a bargain all the time and if we don't spend we will miss out. Saving in a disciplined manner is a hard task in our current environment of materialism fuelled by cheap credit. At least when interest rates were high we could see our savings grow and we borrowed less. Now, my Halifax building society account offers zero interest on our balance and we have had to go elsewhere to get something for our small monthly savings - it's crazy.

The whole market seems geared against savings. There is little focus nationally on pensions and saving for retirement and my wife's IFA business has changed dramatically over the years with structuring and restructuring credit as being her main business versus investment and retirement planning. She firmly puts this down to the attitude of Government, banks and people - it cannot be any one of those alone, it has the right combination and time. At this time, saving for the future is not a priority generally and the whole market is geared toward lending more.

In her opinion, as it is mine, the whole credit crunch was an accident waiting to happen.

Warren Buffett calls it 'capitalism overshooting periodically'. At the height of the crash he invested $5bn into Goldman Sachs and is now sitting pretty. My meagre funds went into the OIC. I am no Buffett but thanks to equally sage advice I have ridden out the storm well. Like Buffett, my pension is down around 25% still, as are his overall assets, but in reality my whole financial situation is as good as it could be in the face of what we have experienced and my pension is clearly for the long term. I am now focused on saving as much as I can. We reduced overall credit card debt to zero by releasing our Halifax savings to make sure we paid no interest while I have been putting as much as I can into my pension.

But how many others have done the same? In fact, the whole panic that has gripped us has seen the focus shift toward getting credit back to previous levels. Britain will soon get back to borrowing more and saving less. Surely, at some point that vicious upward spiral has to end and let's hope it is not as spectacular as last time.

My point here is not a swipe at the Government who have their share to blame. It is not even at the banks who fuel their cash by lending more in their bizarre world of finance. It really is a swipe at us, the public. It really is time to save and invest as the future could get nasty if we don't. Pensions should be brought to front and centre for every working individual and, personally, I don't think retirement planning should be voluntary. I think there should be massive tax incentives to save, instead we get tax on pension dividends, I think insurance premiums should have no tax attached, I think there should be no tax on savings generally.

Realistically, the Government should plan long term - the more we save, the less we will burden the state in our old age. It just makes sense.

Current finances in the country are a mess and it will take a bold Government that thinks long term in this way. However, it really is not rocket science. The more we all save today, the less vulnerable we are to downturns, the less of a burden we will be on the State and the less the system will incentivise us to borrow as banks will see the profit in investments over debt in the end - hopefully.

I have a feeling that pigs may fly first, but I live in hope.

Paying The Price

If you have steadily put money aside for your future in something like a pension, ISA or savings account, have had a relatively secure job over the last 10 years and are due to retire in the next 5 to 10 years, then you are probably bearing the brunt of the financial mess the country is in.

With interest rates at 0.5% and the stock market behaving like a lead-weighted yo yo, prudent savers have been amongst the worst hit by the financial fiasco. It is also likely that the same people will be the major port of call for solving the long term borrowing problems that the Government has bought for the future.

The Pension Pain

If, like me, you have seen your potential earnings in retirement trashed inside of 18 months, it is pretty disheartening to watch the massive monies being spent which we will have to pay back in the future. It can only mean one thing - higher taxes which will probably mean that we will have to work longer in order to save enough money to retire while the burden in retirement will be higher.

The reward for sensible financial controls and diligence by individuals is to have a shorter and less comfortable retirement.

The problem is very serious and there is no longer any real solution to it. The stock market may recover over the next 5 to 10 years but that will for many just get their pension pots back to some kind of parity to the value just ahead of the Crunch. How galling then to see Fred Goodwin lose billions and walk away with a highly lucrative and secure pension from the age of 50 for the rest of his life. But then again, how galling to see rafts of Civil Servants and Politicians get the same benefit but paid for entirely out of your pocket in current tax payments.

Making Pensions Pay

The serious outcome to all of this is that there is a greater potential for people to retire and move abroad to where tax regimes are kinder. Cyprus is currently a country that offer a superb climate, is very anglophile, and has a tax rate of just 20% on pensions. Properties are still reasonable value, the infrastructure and law mimic the UK, English is widely spoken and you are never far from a beach. For the homesick, there are branches of Debenhams to get the essentials like HP Sauce.

I am sure there are many other places, hopefully, that will keep such status despite the onslaught of the EU and 'harmonisation' which is not the process in which Harriet becomes first PM and then President of the United States of Europe - what a terrible nightmare that would be.

But certainly, this is a very real problem for the future and threatens to be another blow to the Government's plan on paying back its borrowing. If less people in retirement stay in the UK, then again tax revenues will fall - particularly if they take their estates beyond the borders of the UK and out of range of Inheritance Tax.

This Government has systematically ignored the growing problems of providing an income in retirement unless you are a Civil Servant or Politician where the fabulous pensions are paid for in current taxes - a nice 'Ponzi Scheme' for those in it. With better than 1 in 4 jobs now in the Public Service, more of our tax will be paying for these pensions as time goes on while we get nothing in return from the Government.

Personally, I think guaranteed, end salary schemes for Civil Servants and Politicians should be stopped immediately and make them carry the same burden as the rest of us and stop us paying for lazy bureaucrats' retirements funds.

Next up - Public Servant Expenses Accounts.