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.

Private Pensions - Darling Loses The Plot

It is estimated that only 4% of the working population reaching the age of retirement will earn anywhere near two thirds of their final income and that includes civil servants, MPs, NHS, teachers, emergency service employees et al who are on fantastic schemes and reach their full entitlement.

So it is very clear that there is simply a massive issue about the amount being saved for retirement. The Government initially attempted to try and plug the looming holes for the future by attempting to incentivise people to take up private pensions via the stakeholder scheme and force employers to contribute into them on their behalf. It was a pitiful attempt to cover the cracks and most of the schemes are pretty laughable. One of the points about the credit crunch and recession was that while we were all leveraging our assets to borrow more money to bolster our actually diminishing wages, savings were going negative.

The facts are simple - nobody is putting enough away for the future.

Changing Thinking

Again, one of the features of the boom of the last 12 years is that we have lived the 'here & now' and forfeited much of our future planning and specifically on pensions. For some odd reason many believe that their property portfolio will sort this out but we have had a stark reminder of 'what goes up up must come down' lately. Plus, Mr. Darling has suddenly got very hard on second homes which for many was seen as wise investing for the future.

At some point, society in general will have to turn its thoughts to how it is going to keep itself in the same standard of living in retirement. I can safely say that it is a matter about which I am very concerned for my family. Despite prudent savings and pension planning, it is nowhere near enough to get me anything like two thirds of my current earnings.

So it came as some surprise that Darling would start to throw cold water on those that change part of their salary and bonus to pension contributions.

Government View

True to the 'here & now' Darling has seen that those around the £150,000 total salary and bonus will be keen to sacrifice some of the salary to get below the threshold for 51.5% (maximum rate plus NI increase) and take the missing part as an employer's contribution on which no tax is currently paid. But Darling is looking at stopping that with a tapering tax system on employer contributions to be paid by the employee that will, for those on £180,000 or more, be up to 30%.

It is seen as stopping tax avoidance as not only is the tax relief saved but the employer pays no NI on the contribution. But it is a false economy - we really need to be pushed to save more for pensions and decrease burdens on the state. If people can maintain their living standards in retirement then there is a fair chance that the strain on the NHS will be less as more people will afford private healthcare as an example plus we will pay more tax (again). It's more than that - society needs to look forward and make sure it is putting aside more - we need to get that discipline in us all.

The tax relief is seen as being unfairly biased to top earners - that's rubbish as all that is happening is that tax already paid is being claimed back. If this were to be widened to all pension contributions then people will have to start thinking about how they can mitigate costs in retirement and that will almost certainly mean that retired people will look to countries like Cyprus where tax is 20% and pensions are portable. I know I have looked at Cyprus and other places like Malta to find a good alternative as this may just be the difference between being above or below the 'two thirds' earning level in retirement. Even if it is not that close, it is now a serious consideration.

While everyone seems to be fixated on the current top earners fleeing the coop, there is more of a danger that middle earners will leave the country in retirement and it is just as barmy as they will be tax payers.

Short Termism

What we are seeing from the Government is a number of short term moves to try and stimulate the 'here & now' again and try to get people to start spending while grabbing money off the top earners which they seem to believe will be popular amongst most earners. After all there are not that many people in Britain that earn over £150,000 a year, and many of those will only be just above it as normal employees and not Directors who may get supplementary goodies.

This may be a precursor to the phasing out of tax relief on pension contributions for PAYE taxpayers and the fall of the employer contributions as part of people's packages. I think it's opening up a gaping problem for the future.