The Office for National Statistics released the latest Quarterly National Accounts during the Festive Season. These Accounts, covering July to September 2015, reveal that the Savings Rate for households and non-profit institutions serving households fell to 4.4% over the quarter – the lowest level in over 50 years. The Savings Rate was around 15% in the mid-1990s but has endured a secular decline over the past 20 years. There was a brief reversal of this trend in 2009/10, in the depths of the Great Recession, but the movement has otherwise been largely in one direction.
The 2010 peak corresponds with the high point in the Lifetime Allowance (“LA”), the maximum amount of pension saving that can be built up with the benefit of tax relief. The subsequent reductions in the LA, and the related Annual Allowance (“AA”), have likely contributed to the fall in the Saving Rate. Further cuts to the LA and RA will take effect in April and might well have a knock-on effect on the Savings Rate too.
Concerns about inadequate saving have been long-standing in the UK, particularly those related to retirement. The Pensions Commission highlighted the shortfall of private pension provision, leading to the introduction of Automatic Enrolment (“AE”) in 2012. AE will not address the lack of saving for retirement in isolation but will make some inroads of its own accord. A second-order effect of AE might be to stimulate the development of a wider savings culture than currently exists.
A key driver of saving for retirement is the tax relief provided on contributions, subject to the constraints imposed by the LA and AA. Tax free growth on these contributions once invested is a supporting factor too. These motivations to save are currently subject to review under the Government’s consultation on pensions tax relief. The outcome of this Consultation is due to be announced in the Budget on 16 March. Is the Chancellor of the Exchequer going to strengthen the incentive to save or is he going to cause a further fall in the Savings Rate?