In what is probably the last throw of the dice for workplace savings before Nest (national savings employment trust) drives a coach and horses through the industry, the new corporate platforms aren’t just opening up investment and functionality, they are adding wrappers, too. Workplace cash and stocks-and-shares Isas (individual savings accounts) are the new great hope for getting folk more engaged in their finances and saving for retirement. You have to admire the triumph of hope over experience as companies plug tens of millions of pounds into developing these new beasts.
And yet…and yet. Negative attitudes to pensions are closely linked to lack of access – your money in a black hole. Isas get round this. They are the most democratic of tax-advantaged products – HM Revenue and Customs stats from April 2012 show 49.4% of adults in England have one, with most in the £10,000-£20,000 income bracket, while 78% of Isas by policy count are in cash (by value it is about 50/50). The number of 25 to 34-year-olds putting money into an Isa in 2009/10 was almost exactly the same as 35 to 44 and 45 to 54-year-olds and there is little gender skew. These are products hard-wired into the consciousness of the British working population. Could they take off when offered through the workplace?
I think they could – especially if cash Isas are offered alongside stocks-and-shares Isas and sharesave rollover facilities. The workplace Isa market is in its infancy, but great things are forecast. Are there any dangers in pushing on down this road?
Let us keep three main points in mind: saving is better than not saving; Isas are about as tax-efficient for retirement as pensions for basic-rate taxpayers; employers are unlikely to contribute into Isas.
On that basis, point three militates against points one and two. If access really is the Holy Grail of long-term savings and investments through the workplace, the big unknown is the value employees will place on it. If, for example, they value flexibility and access more highly than an employer contribution, we could see a sharp fall in join rates to group pensions.
Opt-out rates
If that happened, auto-enrolment would look quite different. Opt-out rates could be higher among mid-affluence groups than currently predicted, with what politicians call “hard-working families” being a key group. So, for example, a median-income worker in her mid- to late 40s with two teenage children heading for university may feel it is worthwhile being able to dip into retirement savings to prevent the crippling debt with which so many students graduate. She might favour Isa saving without an employer contribution.
Many employers, encouraged by consultants and advisers, offer pension contributions well in excess of the minimum required under auto-enrolment, but if the workforce deserts pensions and heads for the sun-drenched uplands of Isas, what price a levelling-down of employer contributions?
People are generally rational, but that rationality may not be the same as tax-planned financial optimisation. Isn’t that OK? In most fields, I’d say it is. But here the ammunition is always live. It’s hard to save enough for retirement. Falling behind – perhaps by taking that withdrawal to pay for tuition fees – has a greater impact than most realise. And the jeopardy is huge – get it wrong at an individual level and your future is at risk. Get it wrong at a macro level and a generation’s future is at risk, as is the future of generations who have to support them.
True rationality would support the use of pensions to maximise employer contributions and Isas for additional savings at the same time. When/if the employee has to step into higher-rate tax, a simple sell-down of the Isa and reinvestment into the pension can give a big boost.
The problem is, this kind of activity needs advice. And advice, particularly in the workplace, is at a premium and likely to become rarer still after the Retail Distribution Review comes into effect on 1 January, 2013.
This is a long way off and pensions will rule the roost for some time yet. Maybe nothing will change, but I’m quietly hoping that change does come. The way things were just doesn’t feel good enough any more.
Mark Polson is director of the Lang Cat consultancy
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