There has been a little confusion about the PMI and Schroders’ Lifetime Savings Initiative. It’s actually quite hard to find the report and it’s best downloaded on this link

In this blog I aim to resolve the confusion and give my view on what looks like A GOOD IDEA.

Better retirement income, not worse pensions

This is not an initiative about taking all your money out of pensions to buy houses. It is a proposal (called the National Lifetime Savings Plan) to allow those who save more than the 8% minimum in auto-enrolment to use the additional savings to be directed towards medium term financial goals like buying a first home or paying down get out of jail problem debt while ensuring the core contribution rate (8% of band earnings) is untouched and invested to purchase a pension in later life.

This is a sensible thing to do. My colleague Alison Hatcher – who is innovation director for the Pensions Regulator – has been arguing that retirement happiness is best with a home of your own.

Steve Webb told the FT,

“Individuals need a mix of short-term and long-term savings, including savings vehicles which will help with house purchase.”

The Lifetime Savings Initiative is also about providing people with easy access to  short-term (sidecar) savings (called the National Short Term Savings Plan) to build up necessary rainy day savings to pay for the stuff that goes wrong (eg the car won’t start, the boiler breaks) – and so builds financial resilience.

This takes me back to when I was taught to be a financial adviser (5-day course) in the early 1980s.  I was told that pensions were none of my business and would either be taken care of by employers or the state. I was told that my job was to get the people I spoke to , to save between 5 and 10% of their earnings for a rainy day and for the future. In those days a 10-year saving plan with a life insurance company got tax-relief (LAPR) so long as you locked your money away for 7.5 years.

This proposal from Schroders and the PMI returns to the three-bucket approach that worked well for my early clients.

Of course, the pension purist in me thinks that all the money should go to pensions but sensible people like Alison, Steve and Ruston Smith who chairs the Tesco Pension Fund, recognise that owning a house in retirement frees up what would have been rent to pay you an income. I’ve just paid off my mortgage to give me a pay-rise of £1000 pm!

I you need to, you can actually take equity release from your home to provide even more income in retirement – which people are doing to make ends meet

The man who taught me about the three buckets was called Abe Bacchus, he came from Jamaica and he’s still a friend, he rented me his house in Brixton when I came to London (1983) and he taught me that while you couldn’t buy a sausage with a brick, you could use the rent to buy all the groceries you needed.

So the link between houses and income was instilled in me early on and Abe remains my financial mentor! There are other bright people who are in on this, Nigel Purves for instance set up WayHome to help people onto the housing ladder through shared ownership – supported by institutional investment.

But I digress from the work of the PMI and Schroders. This is an opportunity for Emma Reynolds, who is conducting the Government’s Pension Review to get this system in place. I had a word about it with Ruston last week and he sent me through the details, but I don’t think this is a very technical idea – just seems to make sense. This is all about helping us get our behaviour right, and making things simpler, which is all I was doing as a “wet behind the ears” insurance salesman over 40 years ago.

My take on the LSI’s three buckets.

The key recommendations and basis of the Lifetime Savings Model (comprising the National Short-Term Savings Plan and the National Lifetime Savings Plan), to address the key pinch points the PMI identified, are:

BUCKET ONE – SHORT TERM SAVINGS PLAN

• Pension providers to offer a small selection of ‘Short Term Savings Accounts’ (like the NEST side car savings) alongside AE to allow people to choose to save in an (accessible) rainy day savings fund.
• Members decide if they want to make short term savings where money is deducted from net pay and could be put in a simple ISA or non-ISA type deposit account – simple but with easy access

Points the PMI and Schroders want us to note about the real challenges people face today

• 46% have £1,000 or less in savings and 16% have no savings at all (Finder)
• The likelihood of falling into problem debt is  44% lower  if you have £1,000 in savings
• This proposal will make it easier to save, build financial resilience and as a consequence also reduce the chance of mental unwellness concerns from financial worries – noting that 1 in 3 adults experience anxiety over paying bills (Mental Health Foundation)

BUCKET TWO – LIFETIME SAVINGS PLAN

1. No change to the value of savings from statutory minimum contributions (currently 8%) – which can’t generally be accessed until age 55 (age 57 from April 2028)
2. Proposal built around the existing AE framework and ‘learnings’ from international models
3. Where someone chooses to pay additional pension contributions, over and above the AE statutory minimum, they can access the value of those additional contributions early for only two reasons:
   • To put down a deposit on a first home (one off event), and
   • To pay down ‘problem debt’ (which is defined)

Points to note

• Mercer’s member data tells us that 68% of the money that people rely on in retirement to make ends meet is ‘non retirement income and savings’– so they’re already depending on Lifetime Savings – and this proposal recognises that and makes it easier for people to think about all their money problems and to take action
• The PMI and Schroders see a systemic risk on their horizon:
  • There are already 2.1m pensioners in poverty
  • Home ownership continues to fall (71% to 64% over the last 10 years) – with 34 now being the average age of a first-time buyer
  • 3 times more people are expected to be renting in retirement over the next 20 years (6% to 17%) – where the average cost of renting in retirement is expected to be equivalent to a contribution of around 9% from the age of 22 (versus current statutory AE minimum of 8% of a band of earnings)
  • So, the AE statutory minimum won’t pay all the rent – never mind switching the lights on or even putting food in the fridge

BUCKET THREE- PENSION SAVING

‘Adequate retirement income’, along the lines of the PLSA retirement income targets is many decades away for youngsters and a pipe-dream unless the state pension is bolstered and auto-enrolment coverage is universal and additional to what we have today.

Personally, I doubt that the current DC system is fit for purpose. Right now, it is little more than a sidecar to the state pension for the un-pensioned and an AVC to those with DB pensions. For AE workplace pensions to become meaningful to people, they need to be done for us by our pension providers – just as I was told they would be all those years ago.

We cannot think of the workplace pension as our sole means of support. The state pension and the ‘rent and mortgage free home’ are two legs of the three-legged stool.

With 1 in 6 of us in the UK having the literacy of a 5 – 7-year many people will need spoon-feeding in retirement and that includes people from all walks of life. Financial inclusion does not necessarily mean personal empowerment.

The second part of the Pensions Review is ‘the time’ to consider a new and bolder vision for the future to really help everyday people – through the Lifetime Savings Model.

The PLSA retirement living standards do not include the payment of rent. If we really see a future of dignity in retirement, we should strive for everyone to have dignity from a lifetime income and freedom from the bondage of high housing costs.