Yesterday I wrote about Nest Insight’s sidecar savings project (now mysteriously called “Jars”). The article caught the eye of Michael Johnson who graphically reminded me of the most effective means ever of increasing the savings ratio.
So – covering my lifetime, we have never seen people spend so little and save so much. Michael, the economist that he is , sees this as “over-saving” and continued
OK, not the ideal policy, but how about some flexibility in pension pots…..limited, penalty-free access for what most people care most about (e.g. home ownership for millennials) ?
Knowing that you don’t have to wait until at least 57 to get any access surely encourages people to save in the first place and keep their options open…..and grab an up-front incentive too. Hang on a minute, we already have that available. It’s called a Lifetime ISA.
Which makes a lot of sense. In today’s world of workplace savings, most people are going to take active decisions about regular savings either using payroll (where the money is being spent on retirement) or through banking payments (in which case the ISA is the most obvious product and the Lifetime ISA , the most obvious variant.
The question for Nest Insight is whether people will change behavior and start saving in Jars as a third way and I’m struggling to see why they might.
Michael Klimes’ headline reports on an OECD research document . Jennifer Mosher of the OECD tells Klimes
“Not many people were paying for advice before Covid-19 and I do not see how it will make more people want to pay for financial advice. They simply are not going to pay more.
“The Pension Wise initiative is quite good but getting people to pay for advice is difficult as it is very hard to value what advice is worth. I don’t have an answer to getting more people to pay for advice and being happy to do it.”
This begs the question “what are advisers supposed to do?”, when advising people about savings and the obvious answer is “encourage them to save more”. This was the adviser’s job till the onset of auto-enrolment and the advent of the RDR when the saving issue (at least for the market) got solved overnight freeing up IFAs to move on to be financial planners to the aspirant and wealth managers to the affluent.
Advisers no longer see their job as encouraging people to save nor are they rewarded for doing so. The choices available to savers are increasingly being taken online and determined by media stars such as Martin Lewis and key journalists in the national press.
The advice gap for most people is filled by online information (call it guidance or advice). Pension Wise is an additional resource, the core choices will be taken through employer portals and online. I am not convinced that most employees want to organize their private savings publicly. The line between ISAs and Pensions is primarily determined by distribution.
But will COVID-19 help low-earners to save?
Again Johnson is helpful in his comments (this time on linked in)
I think we need more detailed data before being sure of a closing savings gap. My hunch, and it is only that, is that those who don’t ordinarily save anything are still not saving anything because all their income goes on essentials (food, rent and utilities)?
The savings ratio tells us nothing about the distribution of savings by, for example, household income decile. A very useful research project beckons? First question: what do we mean by “savings gap”? Is it the national picture, i.e. an aggregation of 30+ million households’ data, or is it a specific reference to those individual households who don’t have any / insufficient savings?
The baggage of poverty needs more than a sidecar
It is clear that those with money have had had trouble spending it in the pandemic. A friend of mine spoke despairingly to me over lunch about how hard it has been to trade up his £27k Ducati to a £35k Ducati (apparently the Ducati showrooms are empty).
Meanwhile, many at the bottom of the income ladder ponder the end of the furlough and study the complex rules surrounding universal credit. Tax planning means little if you don’t pay tax but Government savings incentives exist for all workplace savers (unless yo are in a net-pay scheme). The self-employed can pick up basic rate tax incentives by investing in Nest, but this facility is not publicized.
It strikes me that low-earners, especially self-employed low-earners, have got better things to do than manage their savings in this sidecar. But like Michael, I don’t know whether the issues for the people the sidecar is designed for, are about capacity to save or privacy. The capacity of the workplace to organise retirement savings is proven, its capacity to help people manage short-term savings less so.
Auto-enrolling low-earners into the sidecar, might seem a good idea for policy makers looking for evidence that auto-enrolment rates into pensions can rise, but can we really use insights from employers as proof that the concept works?
The key is to work out (as Michael points out) whether this amazing spike in UK savings through the pandemic is shared by all sectors of the population or whether it excludes the poorest. The answer will probably determine the future of the sidecar and Jars.